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Cost-Benefit Analysis

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A Teaching Topic in Management Sciences

Cost-Benefit Analysis

This topic explores the theory and practice of cost-benefit analysis as a technique to assess large-scale public investment projects, on-going programs, and regulatory interventions. It examines key concepts and commonly encountered analytical problems both through theory and case studies. It looks at the relationships between cost-benefit analysis, budgeting, and broader public sector decision-making. Key concepts include consumers’ surplus, shadow pricing, willingness to pay, social valuations, discounting, the social rate of discount, decision criteria, and distribution (Carleton PADM 5215).

Policy decisions inevitably require difficult trade-offs. This topic covers how to estimate impacts, value outcomes using market prices, value outcomes that are not as easily measured in monetary terms (such as environmental quality, health, and longevity), and how to address uncertainty. This topic is suitable for students intending to conduct cost-benefit analysis as well as those who wish to become more informed consumers or critics (Harvard API-139M).

This topic examines the challenges associated with identifying, measuring and comparing the costs and benefits of existing policies and policy proposals. It deals with decision-making under uncertainty, the quantification of value for public goods, and measuring unintended consequences of government action.

Topic Learning Outcome: Students will be able to analyze and interpret public policy decisions using a rigorous cost-benefit analysis framework. They will understand the role of cost-benefit analysis in budgeting and public sector decision-making in general.

Core Concepts associated with this Topic: Cost-benefit Analysis; Cost-effectiveness Analysis.

Recommended Readings

Harvard API-139M Cost-Benefit Analysis

Boardman, A.E., D.H. Greenberg, A.R. Vining, and D.L. Weimer. 2011. Cost-Benefit Analysis: Concepts and Practice (Fourth Edition). Upper Saddle River, N.J.: Pearson.

Chapter 1, "Introduction to Cost-Benefit Analysis."

Chapter 2, "Conceptual Foundations of Cost-Benefit Analysis."

Chapter 3, "Microeconomic Foundations of Cost-Benefit Analysis."

Chapter 4, "Valuing Benefits and Costs in Primary Markets."

Chapter 5, "Valuing Benefits and Costs in Secondary Markets."

Arrow, K.J. et al. 1996. "Is There a Role for Benefit-Cost Analysis in Environmental, Health and Safety Regulation?" Science. 272:221-222.

U.S. Office of Management and Budget. 2005. "Chapter III: Validation of Benefit and Cost Estimates made Prior to Regulation." Validating Regulatory Analysis: 2005 Report to Congress on the Costs and Benefits of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities. Page 41-53.

Sample Assessment Questions:

1.)  "Cost-benefit analysis for decisions is somewhat different in the public sector than the private sector because while private sector firms' objective is to make money and maximize profit, public sector organizations have a much more diverse and sometimes difficult to measure set of objectives." Please write a 2 page paper either agreeing or disagreeing with this statement, using real world examples.

2.) What are unintended consequences? How can policymakers aim to include the potential for unintended consequences in their cost-benefit analyses given that they are often very difficult to predict and estimate the importance of?

Page created by Ben Eisen and Sean Goertzen on 4 April 2015.


 Useful Resources on the Portal Related to this Topic

  Carleton Course Page: PADM 5215 Benefit-Cost Analysis (Schott)
  Canadian Cost-Benefit Analysis Guide: Regulatory Proposals
  Financial Management and Analysis of Projects - Glossary
  Management Responsibilities for OPS Managers

 Concepts used in this topic

  Cost-Benefit Analysis
  Evidence Based Policy
  Policy Analysis

 Reference collections relevant to this topic

  Cost-Benefit Analysis
  Cost-Benefit Analysis with the Special Case of Morbidity and Mortality-Risk Reduction
  Net Present Value Analysis

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School of Public Policy and Governance