Chapter 18 - Cost-Effectiveness Analysis
from PART IV - RELATED METHODS
Summary
Cost-effectiveness analysis (CEA) is a widely used alternative to CBA, especially in areas such as health and defense policy. Analysts seeking efficient policies but facing constraints that prevent them from doing CBA may find it useful. In particular, CEA circumvents three common constraints. First, analysts may be unwilling or unable to monetize the most important policy impact. Relatedly, clients may not want monetization. This constraint arises frequently in the evaluation of alternative health policies; for example, many people are willing to predict the numbers of lives saved by alternative public health programs but are unwilling to place a dollar value on a life saved. Second, analysts may recognize that a particular effectiveness measure does not capture all of the social benefits of each alternative, and some of these other social benefits are difficult to monetize. In using CBA, analysts face the burden of monetizing all impacts. If the effectiveness measure captures most of the benefits, then it may be reasonable to use CEA to avoid the burden of conducting a CBA. Third, analysts may be dealing with intermediate goods whose linkage to preferences is not clear. For example, the exact contribution of different types of weapon systems to overall national defense is often unclear. In such situations,CBA is not possible, but CEA may give useful information concerning the relative efficiency of alternatives.
CEA compares (mutually exclusive) alternatives in terms of the ratio of their costs and a single quantified, but not monetized, effectiveness measure. For example, alternative highway safety programs may each involve different costs and numbers of lives saved. The cost-effectiveness ratios of the programs would be expressed as dollars per life saved, and the program that costs the least per life saved would be assessed as the most efficient. In many circumstances such an assessment is valid; in other circumstances, however, the assessment would not be valid because cost-effectiveness ratios ignore scale effects, ranking policies that produce small impacts at a relatively low cost per unit above policies that produce much larger impacts at a somewhat higher cost per unit. Consequently, care must be taken in interpreting cost-effectiveness ratios as measures of efficiency.
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- Cost-Benefit Analysis , pp. 464 - 488Publisher: Cambridge University PressPrint publication year: 2017