; Cost effectiveness and Cost benefit analysis
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Cost effectiveness and Cost benefit analysis


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									Economic Evaluation of
   Public Policy and
     Course Overview

       ECON 4140
        Fall 2010
     Objectives of the course

    • This course will apply economic theory and statistics
      to the evaluation of economic policy and programs.
    • Economic policy/programs include
         – Spending on public infrastructure (roads, bridges, hospitals,
         – Spending on programs (environmental protection, training
           unemployed, vaccinations for H1NI, )
         – Regulations
         – Social marketing (health warnings on cigarettes, temperature
           set-backs on thermostats
    • The analytical structure comprises what is known as
      cost-benefit analysis.
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           Course components
    1. Cost-benefit/cost-effectiveness
    2. Measuring and valuing program
    3. The political economy of cost-benefit

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    Part 1: Theoretical foundations of cost
    benefit analysis and cost effectiveness
         • Overview of economic programs and
         • Time value of money
         • Risk and uncertainty
         • Option and existence values

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   Part 2: Measuring and valuing impacts
         – Experimental and quasi experimental
         – Net impact evaluation
         – Review of net impact evaluations
         – Key evaluation methods (qualitative and
         – Performance measurement and monitoring

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    Part C: Thepolitical economy of
    cost-benefit analysis
         – Distributional issues)

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                 Discussion questions

     Imagine you had been asked to provide advice to the
         government on the following policies.
        1. First, what is your opinion? Why?
        2. Now how you would frame the problem and
           what evidence is needed to support your
        3. What are arguments for an opposite policy?
           What evidence would support that view?
        4. What issues of fairness exist, if any?

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                 Policy proposals
    • Making university free
       – requiring repayment of costs through an income
         tax surcharge
       – Requiring no repayment
    • Offering to pay everyone in the workforce a $50
      subsidy to take a flu shot every year.
    • Increasing the price of gasoline by 1¢/liter each
      month for the next 2 years and:
       – Placing the proceeds in general revenue or
       – Devoting the proceeds to energy conservation and
         pollution control technologies
    • Subsidizing those who purchase fuel efficient
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         The beginning

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… divide half a sheet of paper by a line into two columns;
writing over one Pro and over the other Con. Then during
the three of four days consideration I put down under the
different heads, hints of the different motives that at
different times occurred to me, for and against the measure.
When I have thus got them all together, I endeavour to
estimate the respective weights; and where I find two or
three equal, I strike them both. If I find a reasons pro equals
two reasons con, I strike out the three. If I find two reasons
con equal to some three reasons pro, I strike out the five; and
thus proceeding I find at length where the balance lies; and
if after a day or two or farther consideration, nothing new
that is of importance occurs on either side, I come to a
determination accordingly. And although the weight or
reasons cannot be take with the precision of algebraic
quantities, and yet when each is thus considered, separately
and comparatively, and the whole lies before me, I think I
am able to judge better and am less liable to make a rash
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    CEA and CBA: a quick tour
                                    CEA                    CBA

    Scope                 Local – single         Global – multiple
                          output/outcome         outcomes valued
    Unit of measure for   Natural                Money
    Time frame            Better in the          Extended over many
                          Immediate/short-term   years is common.
    Main Decision         Retrospective          Prospective (ex-ante)
    Purpose                                      Value for money (ex-post)
    Application           Activities-outputs-    Outcomes or impacts only
                          outcomes (more on this
    Reference             At least one program   No reference needed
                          alternative            since when benefits
                                                 exceed costs, the project
Page 10                                          can rationally proceed.
                 Types of CBA
     • Ex-ante CBA attempts to project costs and
       benefits forward to support decision-
       making…it is most useful for planning and
       ranking alternative spending
     • Ex-post CBA provides insights after the
       project and may determine value for money,
       servng as a guide for future policy.

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     Example 1 :Vaccination programs for

          • Three vaccine programs are being evaluated for cost

          • Outcomes include:
             – Sick days
             – Total number of employees affected

          • The program with the lowest number of sick days per dollar
            cost is the most cost effective in terms of outcomes.

          • The key assumption is that the three programs are
            essentially similar. No program has a markedly different
            profile in terms of adverse impact; the only difference is

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     Example 2: CEA Training interventions

     A common goal for many training interventions is the return to

     CEA compares the costs of reaching the same outcome by
     alternative methods.

     Typical examples of outcomes include:
       • Return to work for six months
       • Hours of work after the intervention
       • Number of trainees who become employed
       • Wages after training
       • Post intervention Employment Insurance benefit

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      A fast tour of CBA

     • CBA compares investments – especially those in the public
       domain - using economic concepts of social welfare.

     • CBA is rooted in economic theory.

     • The welfare of stakeholders emerges from the comparisons of
       utility for individual stakeholders as revealed by their
       preferences and valuations.

     • Stakeholder choices in the market reveal their preferences and
       become the guide for how to increase (maximize) their welfare.

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  Key assumptions of CBA

     1. Society is composed of individuals who are
        free to make choices (such as how much
        they work), and social welfare is the simple
        sum of individual welfare.

     2. People are the best judges of their welfare
        (consumer/producer sovereignty).

     3. Changes in individual welfare are
        measurable by the willingness to pay for
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     The main features of cost-benefit
    • Cost-benefit analysis includes all social benefits and
    • It sums the values of an investment across all users
    • It must translate change in welfare into a dollar
      amount. This can include benefits such as:
          – Avoided harms (deaths from disease)
          – Lost wages due to inability to work
          – Value of time saved.
    • This creates an inevitable value (political) perspective
      for CBA.

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    CBA uses money to measure everything

    The main advantage of using money to value outcome
    is that all outcomes may be included. This is a major
    advantage over CEA
    Many non-economists are uncomfortable with the main
    steps in CBA:

          • Translating all benefits and costs into money.
          • Comparing the changes in welfare among different groups.
          • Decisions favour majority rule and those with the greatest
            willingness to pay, regardless of personal circumstances.
          • Participants in the economy appear to count more than
            those who do not (the benefits for those earning a wage may
            appear to count more than the benefits for those who are
            unemployed, such as children, retired persons, students,
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     Example 1 – Traffic congestion

          Overpass: A new suburban subdivision is created
          beyond a main east/west transcontinental rail line.
          With 2,000 new households, new retail malls, and a
          main road linking north and south Winnipeg, traffic
          delays caused by rail traffic cause substantial

          Option 1: Create an overpass at a cost of $30 million
          Option 2: Impose restrictions on rail traffic

          CBA compares the ratio of benefits to the costs for
          each option, as well as the “hidden” option of doing
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     Translating benefits into $

• Because CBA needs to
  express all benefits and
  costs as a dollar value,
  simplifying assumptions
  must be used.
• These assumptions can
  dramatically alter a CBA.
• Careful peer review
  requires a team approach
  to create a valid CBA.

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    Example 2 – Vaccination programs

    •     Reduced short-term cost due to
    •     Reduced long-term cost for
          caring for the small number of
          catastrophic incidents
    •     Averted loss of incomes for
          those who are disabled/dying
    •     Averted costs of lost time at
          work and play.
    •     Vaccination program
    •     Economic loss for the small
          number who experience
          adverse reactions to vaccine.

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     Steps in a CBA

     Enumerate costs and benefits
     Value the costs and benefits
     Comparing costs and benefits

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   Appendix 1: Case study

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     Taking Charge! – A training program for single
     parents on social assistance
     Taking Charge! was a pilot program jointly funded by
     HRDC and the Manitoba government. It focused on
     offering a range of supports for single parents on
     income assistance.
     Key features included:
          • High level of support (daycare, counseling, basic
            education, volunteer experience, job placement,
          • The program recruited IA clients, performed
            employability assessments, developed tailored
            training programs, contracted with service
            providers to delivery the training, and supported
            job placement.

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     Cost-benefit model
    Basic for comparison:
    • “Control” group (Income assistance –
      welfare clients who have never taken a
      training program)
    • “Comparison” group (Income assistance
      participants in four other training
    • “Program” group (Taking Charge!)

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   Nature of the CBA
  The outcome of interest is whether TC! participants
  return to work faster than those on Income Assistance
  and whether a TC! “grad” has a “better” employment

  Better is defined as
        – Higher wages
        – Longer employment stints
        – Fewer stints on income assistance

    We addressed this question using regression analysis
    and survival analysis.
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             Costs summary for Taking Charge!
    Overall costs and activity for the main interventions (Fiscal 1997/98)
                                            TC!                        OFE
                                        94/95 - 97/98 Connections      96/97
    Clients served                                        3237                  937                569
    Total program cost                             $10,053,735           $1,256,200           $156,000
    Average cost per client                             $3,106               $1,341               $274
    Special needs payments                                  $6                  $12                $33
    Average cost per client served                      $3,112               $1,353               $307
    % clients employed**                                  0.45                 0.55               0.07
    Clients employed                                      1456                  515                 39
    Average cost per client employed                    $6,905               $2,439             $4,000
    * For TC!, this is clients served from program inception to March 31, 1998. For Employment Connections,
    this is clients served in 1997/98 and for OFE clients served in 1996/98.
    **After nine months of intervention termination, based on the follow-up survey.
    Sources: TC! annual reports, Employment Connections annual reports, OFE annual reports.

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    Summary of post-intervention experience
                                    Percent remaining on assistance            Average time to
                                                                                  come off
                          3 months         6 months            9 months          assistance
   Treatment (TC!)               79%                 71%                65%                   20
                                 76%                 63%                55%                   14
   Comparison*                   79%                 67%                58%                   16
   Control                       87%                 82%                74%                   23
   * Includes EC, OFE, Community Partners and Pathways. The average time to come off assistance
   just for the three groups net of Employment Connections is 17.5 months.

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  The benefit-cost framework
                 Costs                         Benefits
      A. Income assistance         E. Increased benefit reductions
      payments during training     because of earned income
   + B. Training allowances      + F. Reduced income assistance
      (books, special needs)       due to lower time on welfare
   + C. Cost of training         + G. Increased taxes from
                                   employment earnings
    =     D. Total Costs         = H. Total Benefits

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  Average training time (months) and average income assistance payments
  (Item A in Table 76)
                                                     Total IA received
                                    Average            during training        Average
                                   monthly IA                                monthly IA
                  duration of
      Group                           during        (Adjusted duration of       after
                                     training     training multiplied by IA training
                                                       during training)
                     a b c                               a         b      c            d
  Treatment        4.4 3.7 0.7              $904 $3,978 $3,345 $633                 $682
  Comparison       2.7 2.4 0.3              $891 $2,406 $2,138 $267                 $650
  Control*         0.0 0.0 0.0              $897        $0        $0     $0         $693
  * To support the statistical analysis, we defined the intervention for the Controls as
  1 month, but in reality the intervention period for these IA participants is 0.

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