COST BENEFIT ANALYSIS

Public Policy Analysis and Advocacy: Cost Benefit Analysis

Public Policy Analysis and Advocacy: Cost Benefit Analysis

Introduction

Cost-benefit analysis and cost-effectiveness analysis refers to the principal tools for evaluating alternatives when economic constraints and limited resources are considered. Both tools embrace the usual methods of evaluating outcomes, but they also consider results in the light of the resource investments required to obtain them. In this way it is possible to identify and choose those intervention policies that will maximize desired results for any resource constraint.

Cost-benefit and cost-effectiveness analysis change in a basic way. Cost-effectiveness analysis focuses on the costs for outcomes restricted to the measurable goals of an intervention, such as mortality rates, reading scores, and criminal recidivism. In contrast, cost-benefit analysis evaluates alternatives in terms of the monetary value of their goals or benefits in comparison to their costs. That is, cost-benefit analysis represents an attempt to establish the cost of alternatives in monetary units such as dollars and the value of the benefits in such units so that costs and benefits for each alternative and among alternatives can be compared directly. (Barnett, 1996)

Discussion

Cost-benefit analyses provide answers to two questions that link evaluation to policy consideration. First, is the intervention “worth it” in the sense that its benefits will exceed its costs? Second, among those alternatives that meets the first criterion, which have the greatest benefits relative to costs? In answering the first question, one would wish to limit policy considerations to only interventions that yield at least a dollar of benefit for each dollar of cost. However, many potential options may meet that minimal standard. Accordingly, overall benefits are maximized when resources are devoted to those alternatives that yield the greatest benefits relative to costs. Some options in education and health, for example, show benefits of $6 or more for each dollar of resource investment. It is these high-yield alternatives that should have priority in the use of scarce resources.

Cost-Benefit Studies

The most prominent cost-benefit study of preschool education is Barnett's analysis of the Perry Preschool Program, a program designed to provide preschool services of high quality to children in at-risk situations. It embraced low student-teacher ratios, weekly home visits by qualified teachers, and 2-hour weekday classes with well-developed curricula. In the early 1960s, 128 African American students between 3 and 4 years old and from low-income families were randomly assigned to the preschool treatment or to a control group. Attrition was relatively low, and follow-up surveys were done periodically on the status of members of the two groups to see if differences emerged, with the most recent data collected when the subjects were 27 years old. Comparisons showed consistent and statistically significant advantages for the treatment group for a wide range of outcome variables, including test scores, earnings, arrest rates, and welfare participation. (Zerbe, 2002)

Costs were estimated using the ingredients method in 1992 dollars (to control for changes in the price level). Benefits were estimated for the treatment students for the value of child care, reductions in special educational ...