Normative Economics

Normative Economics in Health Economics

Normative economics is a branch of economics that judges economic states and public policies as better or worse, using value premises that are stated openly and then applied with the formal tools of economic analysis. In health economics it turns evidence about costs and health effects into a judgement about what should be done, for instance whether the NHS should fund a new cancer drug. Its main body is welfare economics, and the long argument between welfarist and extra-welfarist health economists is an argument inside normative economics about what should be maximised and whose values should count. Every normative conclusion also rests on predictions about consequences, which belong to positive economics, so the two meet in every cost-benefit analysis and every NICE appraisal.

Value premises and conditional advice

A normative argument in economics combines two kinds of premise. One is a value premise, a criterion that says which states of the world count as better, and the other is a set of positive predictions about what each option would bring about. The conclusion is a ranking of options or a prescription, and it holds only as far as both premises hold.

Marc Fleurbaey's Stanford Encyclopedia of Philosophy entry on normative economics and economic justice notes that many results in normative economics are mathematical theorems whose primary function is analytical. He argues that they are most useful in clarifying ethical values and do not by themselves imply that those values must be endorsed, and he quotes Samuelson's view that examining the consequences of various value judgements is a legitimate exercise of economic analysis whether or not the theorist shares them. An analyst can therefore show that, if the objective is the largest gain in population health from a fixed budget, a technology whose ICER exceeds the cost at which the budget produces health elsewhere should not be funded, without claiming that health maximisation is the right objective.

Fleurbaey also contrasts normative economics with political philosophy. Political philosophy concentrates on social justice in general and on the arguments behind principles, while normative economics also covers resource allocation and the evaluation of public policies in an unjust society and cares more about the effective ranking of social states. Priority setting in a health service fits that description, since it ranks concrete options under a budget where health is already unequally distributed. Fleurbaey also lists inequality measurement and social choice theory among the branches of the field, which health economics draws on when it measures health inequality or compares programmes with a social welfare function.

Welfare as the usual yardstick and where health care strains it

Daniel Hausman's encyclopedia entry on the philosophy of economics observes that economists typically evaluate outcomes exclusively in terms of welfare and that normative economics is standardly called welfare economics. He adds that the focus does not imply a belief that only welfare matters morally, and that it reflects a hope that welfare can be separated from questions of equality, freedom or justice.

Most economists take welfare to be the satisfaction of preferences. Hausman calls this one place where positive theory bleeds into normative theory, because the preference ordering used to predict choices is then used to say what is good for people. Kenneth Arrow, in his 1963 paper on medical care, wrote that saying a change which makes all participants better off should be made is a value judgement and not a descriptive proposition, though a very weak one, and that choosing among Pareto optimal states needs interpersonal comparisons. A Pareto improvement is rare in health policy because almost every reallocation of a health budget has losers, which is why welfare economics turned to hypothetical compensation tests.

Health care strains the preference yardstick more than most markets. Arrow argued that because medical knowledge is so complicated, the information held by the physician about the consequences and possibilities of treatment is necessarily very much greater than that held by the patient, or at least both parties believe so. A patient's willingness to pay is then a weak guide to a treatment's value, one reason health economists looked for criteria beyond individual preference, and the positive side of the problem is information asymmetry.

Arrow and the normative case for non-market institutions

Arrow opened his paper by calling it an exploratory and tentative study of the specific differentia of medical care as the object of normative economics. His subject was the medical care industry and not health, since medical care is only one of many causes of health.

His norm was the competitive model, under which, Arrow explained, social policy could confine itself to redistributing purchasing power and leave allocation to the market. Where the actual market differs significantly from the competitive model, the separation of allocative and distributional procedures becomes, in most cases, impossible. His central claim was that when the market fails to achieve an optimal state, society will to some extent recognise the gap and non-market social institutions will arise to bridge it. The failures themselves are analysed as market failure.

Jeremiah Hurley's chapter in the Handbook of Health Economics describes two related literatures in the normative economics of the health sector. One analyses market failure in health care and insurance markets and the scope for non-market arrangements, and the other debates whether a welfarist or an extra-welfarist framework should be used. He adds that the rival frameworks share the conclusion that market failure pervades the health sector but often differ in their prescriptions for improving efficiency and equity.

Rival normative frameworks in health economics

Brouwer, Culyer, van Exel and Rutten (2008) set out welfarism and extra-welfarism as approaches to the normative analysis of health and health care. They locate the difference in the source and nature of valuation and in the role of the Pareto principle together with the initial distribution of income and wealth. Under welfarism, social welfare is normally a function of individual utilities only, valued as a rule by the affected individual.

In extra-welfarist health policy the relevant outcomes commonly include health or health gain and its distribution, and Brouwer and colleagues regard their selection as a matter for decision makers with authority, not for economists. They trace one root of this view to the decision-making approach of Sugden and Williams (1978), in which decision makers are the source of values and weights in public decisions, and they reject reading extra-welfarism as health maximisation, since health maximisation is manifestly meaningless as a general maximand for the public sector.

The practical consequence is that a cost-utility analysis based on the QALY and a cost-benefit analysis based on willingness to pay rest on different normative foundations. Brouwer and colleagues describe cost-utility analysis as using something like need in place of effective demand and willingness to pay, which insulates welfare judgements from the prevailing income distribution.

Normative criteria in UK appraisal rules

Official UK appraisal guidance writes both foundations into its rules. HM Treasury's Green Book (2026, updated 28 October 2026) states that appraisal estimates the social value of options and that this concept of social value is based on the principles of welfare economics. It gives a willingness-to-pay value for a QALY of GBP 70,000 in 2020-21 prices and allows equity-weighted analysis through distributional weights, which must be presented alongside unweighted estimates.

The NICE manual for technology appraisal, PMG36 (last updated 13 October 2026), rests on a different criterion. Section 6.3.1 states that, given the fixed budget of the NHS, the appropriate maximum acceptable ICER is that of the opportunity cost of programmes displaced by new, more costly technologies, and sections 6.3.4 to 6.3.8 work with a range of GBP 25,000 to GBP 35,000 per QALY gained. Section 6.3.2 explains that a positive net health benefit means overall population health increases, and it justifies decision-making modifiers by an ethical and moral rationale for valuing some health benefits more than others.

The Green Book figure is a willingness-to-pay value of health, while the PMG36 range reflects health displaced within a fixed NHS budget, so the two numbers answer different normative questions.

Illustrative example of one programme judged by two criteria

All numbers here are illustrative and describe no real programme. A catch-up vaccination programme would cost the NHS GBP 6,000,000 more than current practice and is predicted to gain 200 QALYs. Discounting and uprating are ignored.

The first criterion follows welfarist cost-benefit analysis and values each QALY at the Green Book figure.

$$NPSV = v \, \Delta E - \Delta C = 70{,}000 \times 200 - 6{,}000{,}000 = 8{,}000{,}000$$

where $NPSV$ is the net present social value in GBP, $v$ is the money value of one QALY (GBP 70,000), $\Delta E$ is the QALY gain (200) and $\Delta C$ is the extra cost (GBP 6,000,000). The monetised benefit of GBP 14,000,000 exceeds the cost, so the programme passes.

The second criterion follows the NICE logic of maximising health from a fixed budget and counts the health that the same money would have produced elsewhere.

$$NHB = \Delta E - \frac{\Delta C}{\lambda} = 200 - \frac{6{,}000{,}000}{25{,}000} = 200 - 240 = -40$$

where $NHB$ is net health benefit in QALYs and $\lambda$ is the cost at which displaced NHS spending would have produced one QALY, here GBP 25,000. At the lower end of the range the programme would cause a net loss of 40 QALYs. At GBP 35,000 the displaced health is 6,000,000 / 35,000, or about 171.4 QALYs, so the net health benefit is about 28.6 QALYs and the programme adds to population health.

Both tests reduce to comparing the ICER with a value per QALY. The ICER is 6,000,000 / 200 = 30,000, so the cost-benefit test is passed whenever $v$ exceeds GBP 30,000 and the net health benefit test whenever $\lambda$ exceeds GBP 30,000. The disagreement lies in which comparator is right, a consumer's valuation of health or the health forgone elsewhere in a fixed budget, and no further data on the programme can settle that. Under PMG36 the ICER sits inside the range, so sections 6.3.5 and 6.3.7 would have the committee refer explicitly to uncertainty, uncaptured benefits and health inequalities.

Normative economics beside positive economics, value judgements and ethics

Normative economics needs positive economics, because every ranking of options depends on predictions of what each option would do. A value judgement is a single normative premise, while normative economics is the body of analysis that states such premises, combines them with predictions and works out the rankings they imply.

Normative economics is also narrower than ethics. Fleurbaey notes that its formal apparatus leaves out issues that are hard to formalise. Procedural approaches to priority setting, such as accountability for reasonableness, complement it by setting conditions on how decisions are made and explained, without supplying a ranking.

Common misreadings of normative economic results

Most errors come from forgetting that a normative result is conditional on its value premise. The result is only as acceptable as the premise, however rigorous the analysis built on it.

1. A normative result is the economist's personal opinion. Fleurbaey treats the analysis of value judgements as legitimate whether or not the analyst shares them.
2. Cost-benefit analysis is value free because it uses market data. Hausman notes that willingness to pay depends on wealth, so unweighted cost-benefit analysis weights the preferences of the rich more than those of the poor.
3. Cost-utility and cost-benefit analysis differ only in units. In the example above the same evidence passes the cost-benefit test and fails the health test at GBP 25,000 per QALY.
4. Market failure proves that a particular intervention is right. Hurley notes that frameworks agreeing on pervasive market failure often prescribe different remedies, so the remedy needs its own normative argument.

Sources

• Arrow KJ. Uncertainty and the welfare economics of medical care. American Economic Review. 1963;53(5):941-973. AEA copy: https://www.aeaweb.org/aer/top20/53.5.941-973.pdf
• Brouwer WBF, Culyer AJ, van Exel NJA, Rutten FFH. Welfarism vs. extra-welfarism. Journal of Health Economics. 2008;27(2):325-338. doi:10.1016/j.jhealeco.2007.07.003. Author version: https://eprints.whiterose.ac.uk/id/eprint/3789/
• Fleurbaey M. Normative economics and economic justice. In: The Stanford Encyclopedia of Philosophy. First published 28 May 2004; substantive revision 6 May 2026. https://plato.stanford.edu/entries/economic-justice/
• Hausman DM. Philosophy of economics. In: The Stanford Encyclopedia of Philosophy. First published 12 September 2003; substantive revision 4 September 2018. https://plato.stanford.edu/entries/economics/
• HM Treasury. The Green Book (2026). Updated 28 October 2026. https://www.gov.uk/government/publications/the-green-book--2/the-green-book-2026
• Hurley J. An overview of the normative economics of the health sector. In: Culyer AJ, Newhouse JP, editors. Handbook of Health Economics, volume 1. Elsevier; 2000. p. 55-118. Abstract: https://ideas.repec.org/h/eee/heachp/1-02.html
• National Institute for Health and Care Excellence. NICE technology appraisal and highly specialised technologies guidance: the manual (PMG36). Published 31 January 2022, last updated 13 October 2026. https://www.nice.org.uk/process/pmg36/chapter/committee-recommendations-2