Saturday, December 10, 2011

THE DIFFERENCE BETWEEN COST BENEFIT ANALYSIS AND COST EFFECTIVENESS ANALYSIS

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THE DIFFERENCE BETWEEN COST BENEFIT ANALYSIS AND COST EFFECTIVENESS ANALYSIS


Cost Benefit Analysis


? Formal cost-benefit analysis compares the monetary benefits and costs of government actions aimed at improving public well being. Such public sector action range from infrastructure improvements and education on the one hand to protection of environmental quality, human health, and safety, on the other. Cost Benefit Analysis is concerned with assessing all of the economic and social advantages (benefit) and disadvantages (costs) of a project and then quantifying these in monetary terms. To determine net social benefits is not necessary to place a monetary value only on tangible benefits but also on intangible benefit such as freedom from noise, peace of mind living in a safe environment and many more. The intangible benefits are the ‘outputs’ of many public sector activities.


? In cost-benefit analysis you look at all of the benefits and all of the costs on all members of society


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? But sometimes it is difficult to quantify benefit and cost because of the costs and benefits of public sector organizations are not directly measurable in money terms. Cost-benefit analysis can be expensive and difficult to explain because indirect methods (time consuming) are usually employed to approximate monetary values of public actions. Indirect estimating methods are necessary because many public services and benefits have no private sector equivalents; consequently, no market prices exist for directly estimating benefits. Analysts approximate monetized benefits using various estimating and survey techniques. Human health data, statistical and engineering models, and laboratory experiments play various roles. Resulting monetary estimates vary widely and are subject to professional disagreement on methods. Measurement problems can also lead to some important cost-benefit categories being ignored, and results can be subject to wide interpretation in partisan debates. It is reasonable to expect that these factors would result in some reduction and modifications as well as administrative and judicial delay of regulatory initiatives, for good or ill.


• For example, when constructing a new highway there will be monetary cost in the form of construction and maintenance cost and there will be a social cost in the form of landscape disfiguration, exhaust pollution, traffic noise and possible increase in accidents. The social benefits will result from reduced traffic congestion, reductions in travelling time, reductions in distribution costs of goods, the advantages of by-passing towns and villages thereby reducing noise, nuisance and property damage, possible reductions in accidents and so on.


• Thus the Cost Benefit Analysis measure the public benefits of the road-higher level out put measurement


? An another difficulty of using Cost Benefit Analysis is the difficulties of selecting correct discount rate or adjusting for risk and uncertainty.


? Where the objective of Cost Benefit Analysis is to determine an action and the level of that action that achieves the greatest net economic benefit or is the most economically efficient.


Cost Effectiveness Analysis


? Consider those benefit and cost that can be quantifies in term of unit and cost. In other words, Cost Effectiveness Analysis concentrates on measuring the measurable and tries to find the lowest cost between alternatives.


• From the above example (constructing a new highway), the cost effectiveness will measure the mile of road constructed costs-intermediate cost.


? In cost effectiveness analysis, in practice, you look only at budgetary costs and only one measure of effectiveness. Thus, for example, you rank projects on the basis of “lives saved/$”. This ignores other benefits of the various alternatives (e.g. people who are alive feel healthier and are more active). And it ignores user costs.


? It is widely used because social cost and benefits are not always measurable and Cost Effectiveness Analysis with its more realistic requirements.


? It involves a careful appraisal of the present and future quantifiable costs and benefits. Not quantifiable effects are described but not evaluated.


? Where the Cost Effectiveness Analysis’s goal is implementing a specified environmental, health or safety objective at the least or most effective cost.


? Cost-effectiveness analysis is seldom about cost saving or cost minimization.


Major differences between Social and Private Cost Benefit Analysis.


i) Social Cost benefit analysis takes into account a wider range of impacts, not just profits.


ii) In social cost benefit analysis, market prices may not exist for many benefits and costs and market pries may not be used because of market failures. Therefore market prices do not reflect marginal social benefits and costs.





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