An increasing number of long-term schizophrenic patients are discharged from hospitals and taken care of in the community. This change in tendency has both a professional and economical side. The beneficial outcome of community care is well established. The aim of this paper is to appraise the economical implications and possibilities of community care compared to standard hospital care. The price elasticity for mental health services is higher than for other medical services. The demand for mental health care can not be directly compared with the demand for other types of care. This is due to lack of information on what is defined as good quality treatment in care and to define who is the demander of mental health care. Due to lack of defined demand and externalities encountered in the care for psychiatric patients, psychiatric treatment must be seen as a good that warrants government involvement in the financing and delivery of the service. The number in need of community care is estimated to be 12 per 100,000. To find the allocative efficiency in spending of resources on mental health care, it is important to look for the right balance between hospital and community care. There is evidence to assume that community care is more cost effective than hospital-based care. This does not apply to the most disabled schizophrenic patients where the costs are higher and outcome is the same. It is important to measure the costs incurred to family and friends when the total costs of community care are calculated and to find technically efficient production. The literature indicates that the physician/non-physician ratio has been too high. There are reports of dis-economies of scale, but economies of scope might be apparent. There are strong arguments in favour of state provision of psychiatric care for schizophrenic patients most in need. Otherwise the mental health care sector must be regulated with incentives that serve the need of the patients and encourage the most cost-effective treatment. Due to the risk of opportunism, specific assets and bounded rationality contracting involving clinical services should be avoided.