COST EFFECTIVENESS AND COST

BENEFIT ANALYSIS

Dr. Mohamed Sheikh Omar Mohamud

MBChB, MPH candidate
COST EFFECTIVENESS ANALYSIS
COST-EFFECTIVENESS ANALYSIS
(CEA) AND COMPARATIVE CEA

 Cost-effectiveness analysis measures the ratio of the

costs of a program to the effects it has on one outcome
 Measure the cost for a given level of effectiveness:
e.g. cost to increase school attendance by 1 year
 Or, measure the level of effectiveness for a given
cost: years of additional attendance induced by
spending $100
WHEN AND WHY IS CEA USEFUL?
 Good option when there is one key specific
outcome of interest, which is often the case in
policy
 CBA requires quantifying outcomes that are
difficult to quantify (controversial)
 CEA can allows comparison of multiple programs
by comparing impact in terms of one outcome
across schemes
 Helps with decision making, particularly
under a fixed budget (i.e., which will give the
most impact for the least cost?)
CEA REQUIREMENTS AND
CONSIDERATIONS
 Comparative CEA compares the cost-
effectiveness of different programs and requires
impact estimates (for the same outcome) and
information on program costs

 Impact estimates
 Consistent approaches to measuring impact?
 Standardizing estimates?

 Program Costs
 Costs to provider and beneficiary?
 Sunk vs incremental costs?
COST BENEFIT
ANALYSIS
 COST BENEFIT

Any negative effect on an A benefit is any positive

organization resulting from
the implementation of the
project.
Examples:
effect on the organization
resulting from the
implementation of the
project.
Examples:

1. maintenance costs
2. environment
3. research and development 1. increase in productivity
2. reduction in costs
4. labour costs 3. Saving Time
4. Decrease road
 CONCEPT OF COST – BENEFIT
ANALYSIS:
 Cost benefit is a tool which modern financial analysts adopt
before undertaking any financial operation or commercial
activity.

 The ultimate aim of a business organization is to make

profits.

 Therefore, any system in the organization must produce more

benefits as compared to its costs for the organization to
survive & prosper.

BENEFITS
BENEFITS >> COSTS
COSTS
 WHAT IS COST BENEFIT
ANALYSIS..???
 A cost benefit analysis is done to determine how well, or how poorly, a planned
action will turn out.
 The analysis relies on the addition of positive factors and the subtraction of
negative ones to determine a net result.
 CBA has been established primarily as a tool for use by governments in
making their social and economic decisions.
 CBA measures costs and benefits to the community of adopting a
particular course of action e.g. Constructing a dam, by-pass etc.
 When investment made commensurates with the benefit derived, it can be said
that operation is positive and viable; but when benefits derived do not
compensate financial investments made, it can be said that it is financially non-
viable and negative.
WHY COST BENEFIT ANALYSIS.???
Cost Benefit Analysis is used to determine:

whether a solution/project is economically feasible

which of two or more projects provides the best return

on investment

Other issues :

 Is the project worthwhile financially?

 Is it the best option?
 Should it be undertaken at all?
COSTS & BENEFITS OF INFORMATION
SYSTEMS:
COSTS BENEFITS

Hardware Tangible
Telecommunications Increased Productivity
Software Low Operating Costs
Personnel Reduced Workforce

Accessories
Computer :
ink/ribbon Lower Computer
Reduced FacilityCosts
Costs
UPS Intangible
 Services : Increased Organizational

Insurance Improved Decision making

Physical Facilities : Enhanced Employee

Flexibility

Building Increased Job Satisfaction

Furniture Higher Customer

Morale

Satisfaction

Improved Organizational
THE GENERAL STEPS FOR COST BENEFIT
ANALYSIS ARE:
1. SPECIFY CLEARLY THE PROJECT OR
PROGRAMME:
 The first step is to decide on the perspective from which the study is to be
done.
 When we have decided on the perspective on the main elements of the projects
such as, the study of the location, timing, group involved, the connection with
other program, etc, should be considered.
 When the project is fixed the following two program are involved:

1.Physical project: These projects are physical in nature, which is done when an
area is polluted. E.g.,: Public waste treatment plans, hazardous waste removal,
etc.

2.Regulatory project: This project regulates the amount of pollution in the society.
E.g.,: Enforcement of environmental law and regulation, water disposal
practice, restrictions of land for certain activities, etc.,
2.DESCRIBE QUANTITATIVELY THE INPUTS
AND OUTPUTS OF THE PROGRAMME:
 For some projects it is easy to identify the input and output.
 For eg.,if we are planning a waste water treatment project, the staffs
of that program will be able to provide a full physical specification
of the plant, together with the inputs required to build it and keep it
running.
 However, it is harder to predict the externalities caused by the
disposition of nuclear waste.
 Because a restriction on development in a particular area can be
expected to detect development elsewhere into the surrounding
areas.
3. ESTIMATE THE SOCIAL COST AND
BENEFIT OF THESE INPUTS AND
OUTPUTS :
 The next step is to put values on input and output flows.
(i.e) to measure costs and benefits.

 We could do this in any units but in many cases we will be dealing

with effects, especially on the benefit side that are not directly
registered on market.

 This means that we try to translate all the impact of the project or
the program in order to make them comparable among themselves
as well as with other types of public activities.
 4.COMPARE THESE BENEFITS AND
COST :
 Next step is to make comparison between cost incurred and
benefit derived from the project.
 One of them is to subtract the total cost from the total benefit
to get net benefit.
(Total cost – Total benefit = Net benefit).
 If the net benefit is positive then the cost benefit is positive
and if the net benefit is negative then the cost benefit is
negative.
 Another method is called Cost benefit ratio it is calculated by
taking the ratio of benefit and cost.
COST BENEFIT ANALYSIS:
MERITS
1.
1. The CBC analysis may be
applicable for both the new as
well as old projects.
DEMERITS
The government is not
completely aware of all the cost
and benefits associated with the
program.

2. It is based of accepted social

principle that is on individual
2. This approach does not clearly
preference.
states that who should bear the
3. This method encourages population control cost.

development for new techniques

for the evaluation of social
benefits. 3. The method of collecting data for
this analysis is generally biased.
HOW IS CEA DIFFERENT FROM
COST-BENEFIT ANALYSIS?
 Outcomes
 CBA: Ratio of costs of program to all identified outcomes
(benefits)
 CEA: Ratio of costs of program to one defined outcome
(benefit)

 EXAMPLE:
 Ratio of cost of education program as a ratio to its impact
on learning, physical and mental health, household
bargaining power, future labour market outcomes,
intergenerational well-being
 Ratio of cost of education program as a ratio to its impact
on learning
CONCLUSION :
 It gives planners a method to try and “put all relevant costs
and benefits on a common temporal footing” in order to help
people make informed decisions.

 It provides people with an understanding as to the economic

costs of decisions, and allows arguments to be made for or
against a change based upon economic considerations.

 It is a decision-making process that forces the decision maker

to compare all direct and indirect positive and negative effects
of the proposed decision on an objective basis.

 A CEA/Comparative CEA is not enough information to make a

policy decision, but it can be a good starting point