Cost–Benefit and Cost-Effectiveness
POLICY DECISION LAB · LABORATORY 07
Cost–Benefit &
Cost-Effectiveness.
Compare resources used with social consequences over time. Discount future streams, test optimism and distribution, and recognize when cost per outcome is more honest than assigning money values to everything that matters.
TWO APPRAISAL QUESTIONS
Is it worthwhile?
Is it efficient?
Cost–benefit analysis monetizes social consequences to assess net value. Cost-effectiveness compares costs with a common outcome when monetization is inappropriate or unnecessary.
Do benefits exceed costs?
NPV = PV(B) − PV(C)
Useful when major consequences can be valued credibly and the decision concerns overall social return.
What is the cost per outcome?
CER = PV(C) / Outcome
Useful when options pursue the same measurable outcome but monetizing that outcome would be contentious.
TIME AND SOCIAL VALUE
Future consequences
have present value.
Discounting
PVₜ = Xₜ/(1+r)ᵗ
The social discount rate determines how future costs and benefits enter today’s appraisal.
Benefit–cost ratio
BCR = PV(B)/PV(C)
Values above one indicate discounted benefits exceed discounted costs.
Incremental analysis
ΔC/ΔE
Compare additional cost with additional effect relative to the next credible alternative.
DISCOUNTED APPRAISAL LAB
Change the assumptions.
Test social value.
Enter investment cost, annual benefits, outcome scale and horizon. ECONORIA calculates NPV, BCR and cost-effectiveness after optimism and equity adjustments.
APPRAISAL VERDICTDiscounted social benefits exceed costs under the current assumptions. Report sensitivity before recommending commitment.
APPRAISAL DISCIPLINE
Monetization must not
erase moral limits.
Define the baseline
Count only costs and benefits additional to the credible counterfactual.
Avoid double counting
Do not add income, output and the same underlying welfare benefit repeatedly.
Report distribution
Positive aggregate NPV can coexist with serious losses for particular groups.
Keep rights as constraints
Not every legal, ethical or ecological threshold should be traded against money.
SCIENTIFIC CHECKPOINT
When is cost-effectiveness
especially useful?
Which situation best fits cost-effectiveness analysis?
Cost-effectiveness retains the outcome in natural units.
