Benefit-Cost Analysis

Overview

Benefit-cost analysis represents the “granddaddy” of outcome-based analysis. Although complex, its purpose is to answer a simple, straightforward question that program administrators, funding bodies, policy makers, and taxpayers are most interested in: Does a program’s benefits outweigh its costs? Although a simple question to ask, we will see in this chapter that a simple answer is most difficult and typically given with a number of cautions.

The primary issue addressed by benefit-cost analysis is whether the impacts of the program are big enough to justify the costs needed to produce them. As a type of outcome-based analysis that weighs a program’s benefits and costs, it relies heavily upon the clear delineation and measurement of impacts and the costs involved in generating them. Indeed, one cannot do benefit-cost analysis without detailed information about impacts, which you’ll remember from Chapter 4, are the statistically significant differences between program mean scores and those from properly constituted comparison conditions. Hence, a comparison group is essential in benefit-cost analysis, and the preferred OBE design is the experimental/control in which program or service recipients are assigned randomly to the two comparison conditions. My advice is to not attempt benefit-cost analysis unless you can use an experimental/control design, or have two programs that you wish to compare that are truly equal except for core-service functions.

Because of its major focus, benefit-cost analysis is used frequently for policy evaluation. Current public policy is based on two fundamental principles: equity and efficiency. Equitable programs contribute to balancing the needs and desires of the various groups in society, whereas efficient programs are those that serve to increase the net value of goods and services available to society. Benefit-cost analysis is a tool developed to determine whether a program produces effects that justify the costs incurred to operate the program.