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Economic Evaluation of
Public Policy and
Programs
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,
etc.)
– 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
analysis
2. Measuring and valuing program
impacts
3. The political economy of cost-benefit
analysis
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Part 1: Theoretical foundations of cost
benefit analysis and cost effectiveness
analysis
• Overview of economic programs and
policy
• 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
design
– Net impact evaluation
– Review of net impact evaluations
– Key evaluation methods (qualitative and
quantitative)
– 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
conclusion?
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
vehicles
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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
step.
Page 9 Benjamin Franklin, 1772
CEA and CBA: a quick tour
CEA CBA
Scope Local – single Global – multiple
output/outcome outcomes valued
Unit of measure for Natural Money
outcome
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
later)
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
employees
• Three vaccine programs are being evaluated for cost
effectiveness.
• 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
efficacy.
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Example 2: CEA Training interventions
A common goal for many training interventions is the return to
work.
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
something.
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The main features of cost-benefit
analysis
• Cost-benefit analysis includes all social benefits and
costs.
• 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,
etc.)
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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
delays.
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
nothing.
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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
Benefit
• Reduced short-term cost due to
illness
• 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.
Cost
• 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,
etc.)
• The program recruited IA clients, performed
employability assessments, developed tailored
training programs, contracted with service
providers to delivery the training, and supported
job placement.
http://www.hrsdc.gc.ca/en/cs/sp/hrsdc/edd/reports/1999-
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000448/sp-ah109-e.pdf
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
interventions)
• “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
outcome.
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)
Employment
TC! OFE
94/95 - 97/98 Connections 96/97
97/98
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
Group
3 months 6 months 9 months assistance
(months)
Treatment (TC!) 79% 71% 65% 20
Employment
76% 63% 55% 14
Connections
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
Adjusted
Average during training Average
average
monthly IA monthly IA
duration of
Group during (Adjusted duration of after
training
training training multiplied by IA training
(months)
during training)
a b c a b c d
Treatment 4.4 3.7 0.7 $904 $3,978 $3,345 $633 $682
(TC!)
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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