Includes bibliographical references. / Some people have argued that there is no reason to expect economic efficiency in a government enterprise because the funds allocated to various ends have to be exhausted to meet targets. In a social and welfarist sense, this argument seems valid if in essence, such earmarked targets, to improve societal welfare, are met. However, in the face of rising hospital costs and insufficient government funds, the issue of effectively allocating government funds to alternative uses becomes paramount. The setting for this research paper is Nigeria. This research work aims at investigating how well financial resources are used in government hospitals in Nigeria. It not only explores the resources employed in hospitals, but also how well these hospitals use minimum resources to achieve maximum outpatient and inpatient output. Hospital cost and expenditure data are collected from 40 government cottage and general hospitals in South East Nigeria (Anambra and Enugu states specifically). The data is collected by means of open-ended questionnaires, which are filled in by relevant administrators in the hospitals visited and also by ministry of health personnel at the state levels. The main research question asked is whether hospitals in this part of the country (and indeed Nigeria as a whole) are allocatively inefficient. A second question as to whether hospitals in Anambra State are more efficient than Enugu State is also posed. The major component of the research involves using the cost and expenditure data to build cost functions for the entire hospitals studied. The main thrust of analysis is the stochastic frontier process, which also incorporates an efficiency effects model. The choice of this model, above all else, is because it provides numerical efficiency estimates and thus provides quantifiable proof of how well poorly Nigerian hospitals fare. It is found in the analysis of the data collected that the hospitals studied are generally inefficient, as 70 percent of them operate at costs above the average permissible cost frontier.