Background: A major share of the hospital budget is spent on drugs. Irrational use of these drugs is a waste of financial and human resources that could have been deployed for another use within the hospital setting especially in cases where such drugs are provided free to patients. Also there is increased morbidity and progression of severity with irrational use. The objective of this study was to determine the irrational use of chloroquine and the subsequent cost implications in Lagos State general hospitals. Methodology: A retrospective study period of one year (January to December, 2000) was selected. A total of 18,781 prescription forms of "Free Eko Malaria" were sampled for children and adults from all the Lagos State general hospitals. Drug costs in each prescription form were identified. Cost effectiveness analysis of chloroquine tablet and intramuscular injection was undertaken. Results: The average cost of medicine per prescription was N 132.071 ($1.03) which should have been N 94.22 ($0.73) if prescribed rationally. The total cost of prescriptions for malaria under study was N 2,480,425.00 ($19,348.09). About 68% {(N 1,679,444.00) ($13,100.19)} of the total cost was lost to irrational prescribing. This is a waste of scarce resources. When the prescriptions were differentiated into the different dosage forms prescribed, the prescriptions containing intramuscular injections only had over 90% of the cost lost to irrational prescribing. Cost effectiveness analysis showed that chloroquine tablet was 17 times more cost effective than chloroquine injection (intramuscular) from a health care system perspective while it was 14 times more cost effective from a patient perspective. Conclusion: There is waste of scarce resources with irrational dispensing of drugs and these resources could have been deployed to other uses or areas within the hospitals. The tablet chloroquine was more cost effective than injection chloroquine (intramuscular). Increasing the cost of tablets, decreasing effectiveness of tablets, decreasing the cost of injections and increasing the effectiveness of injections did not change the cost effectiveness conclusion.