AbstractDuring the 1980s, Nigeria faced difficult economic conditions resulting in a severely constrained budget for public health services. To assess more carefully the costs and efficiency of the public and private health sectors, the Federal Ministry of Health in Nigeria undertook a comprehensive survey of health care facilities in Ogun State in 1987, the analysis of which is presented in this study. The findings suggest that there is potential to increase service delivery within existing budgets by more cost‐effective allocation of inputs. Many public and private providers are not operating at full technical capacity. It also appears that public facilities are not using cost‐minimizing combinations of high and low‐level health workers, in particular, too many low‐level staff are being used to support high‐level workers. The cost analysis indicates that there are short‐run increasing returns to scale for inpatient and nearly constant returns to scale for outpatient services. Economies of scope for joint production of inpatient and outpatient services are not being realized. A major implication of such analysis is that improved resource allocation decisions heavily depend on the existence of information systems at the health facility level which carefully integrate financial information with other appropriate and adequate measures of service inputs, health care quality, facility utilization and ultimately he