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Economic studies on disease in farm livestock have focused largely on cost/benefit analyses of control programs or gross estimates of the costs due to particular diseases. Neither offers an adequate basis to guide economic decisions. This paper develops a framework with a more rigorous underpinning in economic concepts and principles. First, the total economic cost of a disease is explained in terms of two distinct components: (i) output losses following disease occurrence; (ii) expenditures made to treat disease or prevent its occurrence. We then develop the general relationship between these two components, calling it the ‘loss-expenditure frontier’, and use it to define the economically optimal level of disease costs. This shows that the relevant measures of the economic cost of disease are not the total cost figures usually estimated. The paper explains how, in principle, the loss-expenditure frontier can provide the appropriate information for decisions on disease control, and demonstrates this using survey data on subclinical mastitis in the UK dairy national herd.