Chapter 11:
Measuring Efficiency
Created By
Kelly Sommerfeld
Introduction to Chapter 11

What are some examples of common
resource allocation dilemmas faced by
planners, funding groups, and policymakers?
Cost-Benefit vs. CostEffectiveness

Cost - Benefit: The outcomes of programs
are expressed in monetary terms.

Cost-Effectiveness: The outcomes are
expressed in substantive terms.
Key Concepts in Efficiency
Analysis

What is the value?

What are the limitations?
Ex Ante and Ex Post Efficiency
Analyses

(1)
(2)
Most commonly undertaken:
Prospectively during the planning and
design phase of an initiative (ex ante
efficiency analysis)
Retrospectively, after a program has been in
place for a time and has been demonstrated
to be effective by an impact evaluation, and
there is interest in making the program
permanent or expanding it (ex post
efficiency analysis)
Cost-Benefit Analysis




Requires estimates of the benefits of a program and
estimates of the costs of undertaking the program.
Requires the adoption of a particular economic
perspective
Least controversial when applied to technical and
industrial projects.
Attempt to value both inputs and outputs at what is
referred to as their marginal social values.
Cost-Effectiveness Analysis



Requires monetizing only the program’s
costs.
Benefits are expressed in outcome units.
Efficiency is expressed in terms of the costs
of achieving a given result.
Conducting Cost-Benefit
Analyses


Assembling Cost Data
Sources of Cost Data:




Agency fiscal records
Target cost estimates
Cooperating agencies
Accounting Perspectives



Individual participants or targets
Program sponsors
The communal social unit involved in the program
Measuring Costs and Benefits

What are the problems?


Identifying and measuring all program costs and
benefits
Difficulty of expressing all benefits and costs in
terms of a common denominator (meaning
translating them into monetary units)
Monetizing Outcomes





Money measurements
Market valuation
Econometric estimation
Hypothetical questions
Observing political choices
In summary, all relevant components must be included
if the results of a cost-benefit analysis are to be valid
and reliable and reflect fully the economic effects of
a project.
Vocabulary To Know





Shadow Prices
Opportunity Costs
Secondary Effects
Distributional Effects
Discounting
Final Step in Cost-Benefit
Analysis


Comparing total costs to total benefits
Most direct way is by subtracting costs from
benefits after appropriate discounting

Example: Program may have costs of $185,000 and
calculated benefits of $300,000. In this case, the net benefit
is $115,000.
Conducting CostEffectiveness Analyses




Based on the same principles and uses the
same methods as a cost-benefit analysis.
Contrast though is that the analysis does not
require that benefits and costs be reduced to
a common denominator.
Programs with similar goals are evaluated
and their costs compared.
Efficiency is judged by comparing costs for
units of outcome.
Summary

Efficiency analyses: Provide a framework for
relating program costs to outcomes.

Cost-Benefit analyses: Directly compare
benefits to costs in monetary terms.

Cost-Effectiveness analyses: Relate costs
expressed in monetary terms to units of
substantive results achieved.
Resource

Rossi, Peter H., Lipsey, Mark W., Freeman,
Howard E. (2004). Evaluation: A
Systematic Approach. Thousand Oaks,
California: Sage Publications, Inc.