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COST BENEFIT ANALYSIS |
COST EFFECTIVENESS ANALYSIS |
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Useful when it is possible to express all costs and benefits in money units. |
Useful when it is easier to identify benefits than to value them in money terms. |
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Useful when deciding whether the Government or institution should be involved in the activity at all and how much to spend. |
Useful when deciding on the optimal use of a fixed quantity of resources and prioritizing alternative expenditure options. |
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Useful when it is important to know the wider economic effects of a project and when deciding on national infrastructure investments. |
Useful when projects need to be ranked on the basis of comparative cost per unit of effectiveness or units of effectiveness per dollar. |
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Useful when deciding whether to go ahead or reject a single project, when an absolute criterion is required. |
Useful when deciding between a large number of alternatives, where a single measure of effectiveness is available. |
Applications of Benefit-Cost Analysis – A Regulatory View
"Cost-benefit can be applied to public actions using varying degrees of formality (how far analysts go in trying to compare monetized benefits with costs). At one level, cost-benefit analysis can be used:
• As a formal economic analysis of the gains to the economy or social well-being from a public action where the difference between monetized benefits and costs is used as a test or screen for evaluating alternatives and for guiding the scale of a public action.
The objective in this use of the tool is to provide decision guidance on which actions improve economic efficiency, i.e. which action produces the greatest net economic gain regardless of who within the economy actually gains and loses as a result.
Alternatively, cost-benefit is often used:
• As a framework for organizing quantitative and qualitative information on the positive and negative effects of a public action.
This can include both monetary and nonmonetary costs and benefits, impacts on different economic interests, and positive and negative physical effects on the environment, human health, safety, etc. This broad impact analysis is currently done by government agencies for major regulations and some proposals would codify this process for all regulations above certain minimum thresholds."²
Applications of Benefit-Cost Analysis –
A View from the Office of Management and Budget
Benefit-Cost Analysis: "Although net present value is not always computable (and it does not usually reflect effects on income distribution), efforts to measure it can produce useful insights even when the monetary values of some benefits or costs cannot be determined. In these cases:
A comprehensive enumeration of the different types of benefits and costs, monetized or not, can be helpful in identifying the full range of program effects.
Quantifying benefits and costs is worthwhile, even when it is not feasible to assign monetary values; physical measurements may be possible and useful.
"Other summary effectiveness measures can provide useful supplementary information to net present value, and analysts are encouraged to report them also. Examples include the number of injuries prevented per dollar of cost (both measured in present value terms) or a project's internal rate of return.
"Cost-Effectiveness Analysis. A program is cost-effective if, on the basis of life cycle cost analysis of competing alternatives, it is determined to have the lowest costs expressed in present value terms for a given amount of benefits. Cost effectiveness analysis is appropriate whenever it is unnecessary or impractical to consider the dollar value of the benefits provided by the alternatives under consideration. This is the case whenever (i) each alternative has the same annual benefits expressed in monetary terms; or (ii) each alternative has the same annual affects, but dollar values cannot be assigned to their benefits. …
"Cost-effectiveness analysis can also be used to compare programs with identical costs but differing benefits. In this case, the decision criterion is the discounted present value of benefits. The alternative program with the largest benefits would normally be favored."³