Costbenefit Analysis

A method of comparing the costs and the (money-valued) benefits of various alternative courses of action. It usually requires the calculation of present values using a social discount rate. It entails the systematic comparisons of all those relevant costs and benefits of proposed alternative schemes with a view to determining (a) which scheme, or size of scheme, or combination of schemes, maximizes the difference between benefits and costs, or (b) the magnitude of the benefit that can result from schemes having various costs. The concept of cost or benefit employed is sometimes that of social cost or social benefit.

However in other cases the scope of the cost and benefit concepts is defined by the interests of the clients for whom the analysis is conducted after discussion between clients and analysts about the options to be considered and the objectives to be sought. This is known as the perspective of the study.

Cost-benefit Analysis 75

The virtues of explicitness (in the objectives postulated, the assumptions and methods adopted) and consistency (the principle that decisions between alternatives should be consistent with objectives) are common to all forms of cost-benefit analysis. Beyond these, however, there are two broad perspectives that analysts may follow: one is often termed the 'social decision makers'' perspective and the other the 'societal' perspective. Under the social decision makers' approach, the analyst addresses the question of concern to the decision maker (which may in practice take considerable eliciting) and adopts the decision maker's values. This way of approaching the cost-benefit analyst's task is somewhat akin to a consultant's role. The social decision maker is the client.

The other approach involves the analyst in stipulating the social objectives and making the necessary value judgments (or making a value judgment about where they might be obtained other than from decision makers). In this role the analyst is somewhat distanced from those who make decisions, which may, on the one hand, have the useful consequence of exposing some choices that a decision maker may prefer to leave unexposed but, on the other, may result in the fruits of the analysis gathering dust on someone's shelves. The former approach is sometimes characterized as being consistent with extra-welfarism, perhaps because the client may reject welfarism, though there is no particular reason why the analyst adopting the second approach should not also take an extra-welfarist view.

Making value judgments is inherent in the practice of cost-benefit analysis. In addition to choosing the perspective, other critical choices, all of which involve making value judgments on behalf of society, usually include choice of outcome measure (and, if complex, like 'health gain', its constituents, their reasonable measures, their scaling and their combining); choice of cost measure; and matters concerning the distribution and weighting (geographical, between patient or disease groups, ages and sexes, and so on) of consequences, whether costs or benefits. To treat these weights as 'equal' is, of course, not to escape making a value judgment: it is to value them equally.

Explicitness in cost-benefit analysis also extends to the treatment of uncertainty. It is convenient to identify uncertainty in relation to the parameters of parts of the analysis and uncertainty in relation to the data themselves.

The usual decision rule in cost-benefit analysis is for the benefit-cost ratio (B/C) to exceed unity or for (B - C) > 0. See also Benefit-cost Ratio, Cost-effectiveness Analysis, Cost-utility Analysis, Equity, Shadow Price.

76 Cost-consequence Analysis

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