Cost Analysis CostEffectiveness Analysis BenefitCost Analysis Overview Clive
Cost Analysis Cost-Effectiveness Analysis Benefit-Cost Analysis Overview Clive R. Belfield
Goals 1) Basics of Cost Analysis (CA); Cost-Effectiveness Analysis (CEA); and Benefit-Cost Analysis (BCA) 2) Relate to theory of change/action 3) Keep it simple 4) Improve policymaking
Basics
1 Cost Analysis CA: Description of resources needed to deliver a program Limited resources: Can we afford proposed new programs, interventions, reforms? Examples: § Vouchers save money? § MOOCs are low-cost through high scale? § Schools-in-schools are cost-less via reallocation?
2 Cost-Effectiveness Analysis CEA: Links program resources to outcomes Look at: What works at what cost? Examples: § Reducing class size: big effects but high cost § New curricula: modest effects but low cost § Mentoring: varied effects but varied costs
3 Benefit-Cost Analysis BCA: Links costs to economic consequences Look at: What are consequences if program is implemented? Examples: § Youth support program: high cost but save on future incarceration § Early education: high cost but save on future remedial education
Theory of Change
Cost
Cost Effect (alternative)
Cost Value in $ (all if independently valuable)
Value in $ = higher earnings from improved student achievement Cost
Cost Value in $ = Parent fees Savings in school counselors Lower wages from CWD
Value in $ = higher earnings from improved student achievement Cost Value in $ = Parent fees Savings in school counselors Lower wages from CWD
Cost
CEA and BCA are Distinct Similar cost methods (C ≈) Differ significantly on how to value the outcomes of a project (B ≠ E) Can do both, but better to choose CEA or BCA Structuring and framing in relation to theory of change is critical
Keeping it Simple
Cost Analysis Identifies and enumerates all resources required to implement a policy Incremental costs over “next best alternative” or “business-as-usual” Distinguish prices from quantities Total Cost and Average Cost per enrollee
Cost Example Add-on high school mentoring program for 500 students: 4 teachers @ $100, 000 per 4 classrooms @ $25, 000 per Add-on after-school program for 1, 000 students: 6 counselors @$80, 000 per Mentor Program Afterschool Program 500 1, 000 Personnel $400, 000 $480, 000 Facilities $100, 000 $120, 000 Total Cost $500, 000 $600, 000 $1, 000 $600 Total number of students 1 gym @ $120, 000 per Average Cost
Induced Costs?
Delivery Cost Induced Cost (e. g. students in school longer, do more homework; teachers work more hours, communicate more with principal…)
Cost-Effectiveness Analysis Compare policy alternatives Use uni-dimensional measure of effectiveness Measure must capture all program goals
CEA Example HS Dropout rate = 20% Mentor program Afterschool program Total cost $500, 000 $300, 000 Baseline dropouts 100 5 2 $100, 000 $150, 000 School size = 500 Mentoring program: Costs $1, 000 per student Reduces dropout rate by 5% After-school program: Costs $600 per student Reduces dropout rate by 2% Yield of new high school graduates CE ratio
CEA Example HS Dropout rate = 20% Mentor program Afterschool program Total cost $500, 000 $300, 000 Baseline dropouts 100 5 2 $100, 000 $150, 000 School size = 500 Mentoring program: Costs $1, 000 per student Reduces dropout rate by 5% After-school program: Costs $600 per student Reduces dropout rate by 2% Yield of new high school graduates CE ratio
Interpretation?
Interpretation Compared to schools with no add-on services, the cost per new high school graduate is $100, 000 with mentoring program (in a school size 500 with baseline graduation rate of 80%) The mentoring program is more cost-effective than the after-school program at increasing high school graduation rates
Benefit-Cost Analysis Evaluates programs as investments Monetized effects called benefits Report as a social return on investment
BCA Example Mentoring program reduces dropout rate by 5% Each new high school graduate compared to a dropout over lifetime: q Earns $120, 000 more q Saves taxpayer $30, 000 in spending on crime Mentor program Total cost over baseline C Yield of new high school graduates $500, 000 5 Total earnings gain B $600, 000 Total crime saving B $150, 000 Benefits $750, 000 Net Benefit (B-C) $250, 000 Benefit-Cost Ratio (B/C) 1. 50
Clarifications Investments where benefits exceed costs are preferable Benefits are distributed across society Benefits are often predicted not measured
Achievement Effects? Percent Using High School+ Math at Work All Workers College-educated Workers Daily 16 18 Weekly 8 11 Less than weekly 76 71
Improving Policymaking
Executive Order 13563 “Our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness, and job creation. It must be based on the best available science” “Each agency must… propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs (recognizing that some benefits and costs are difficult to quantify)… select, in choosing among alternative regulatory approaches, those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity)”
Policy Relevance Not focused on hypothesis testing Focus on policy relevance Balance science and policy Even if ignored, economic imperatives are hard to break
Economics Bites?
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Reading Recovery Won’t do it because it will cost too much… … Can’t justify spending so much on a few kids… … Won’t be allocated enough money to do it … Money won’t be permanent… … Personnel will drop out…
Scored 1) Basics of Cost Analysis (CA); Cost-Effectiveness Analysis (CEA); and Benefit-Cost Analysis (BCA) 2) Relate to theory of change/action 3) Keep it simple 4) Improve policymaking
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