Cost-Benefit Analysis
Joe Norris
EDAD 684: School Finance/Ethics
January 19, 2011
Cost-Benefit Analysis Defined:
Cost-benefit analysis is a term that refers both to:
• Helping to appraise, or assess, the case for a
project, program, or policy proposal;
• An approach to making economic decisions of
any kind.
Cost-Benefit Analysis Defined:
Under both definitions the process involves,
whether explicitly or implicitly, weighing the
total expected costs against the total expected
benefits of one or more actions in order to
choose the most beneficial or profitable option.
The formal process is often referred to as either
CBA (Cost-Benefit Analysis) or BCA (BenefitCost Analysis).
Closely Related Formal Techniques
•
•
•
•
Cost-Effectiveness Analysis
Economic Impact Analysis
Fiscal Impact Analysis
Social Return on Investment (SROI) Analysis
These slightly different techniques build upon the
logic of CBA, but differ in that they are designed to
inform the practical decision-making of managers
and/or investors focused on optimizing their social
and environmental impacts.
Theory of CBA
• Often used by governments to evaluate the
desirability of a given intervention;
• Heavily used in today’s government;
• An analysis of the cost effectiveness of different
alternatives in order to see whether benefits
outweigh the costs;
• Aim is to gauge the efficiency of the intervention
relative to the status quo;
• Costs and benefits are evaluated in terms of the
public’s willingness to pay for them (benefits) or
willingness to pay to avoid them (costs).
Theory of CBA
• The guiding principle is to list all parties affected
by an intervention and place a monetary value of
the effect it has on their welfare as it would be
valued by them.
• The process involves monetary value of initial
and ongoing expenses vs. expected return.
• Analysts try to estimate costs and benefits either
by using survey methods or by drawing
inferences from social and market behavior.
CBA Specific to Educational Initiatives
• The use of educational cost-benefit analysis is now
widely accepted and has definite advantages in the
“era of accountability.”
• Costs are related to benefits from education, the
latter being quantified via age-earnings profiles.
Rates of return may be social or private.
• There have been many CBA studies mostly showing
quite high returns to investment in education.
• Rates of return are usually higher for primary
education than for secondary, higher for secondary
than for higher education.
CBA Specific to Educational Initiatives:
Some Criticisms
• Rates of return indicate whether to invest in a
particular direction but cannot tell us how much
to invest.
• How do we adjust for the influence of factors
other than education?
• Uncertainty regarding future economic
conditions;
• Failure to allow for educational quality;
• Imperfections and fluctuations in labor markets.
CBA Alternatives in Education
The two main alternatives to CBA in educational
planning include “manpower planning” and the
“social demand approach”.
• Manpower planning assumes a rigid occupational
composition of the workforce, that educational
background relates directly to occupation, and
assumes that jobs are clearly differentiated, all of
which may be unrealistic.
• The social demand approach focuses on forecasts of
future choices by students and their families,
especially regarding higher education.
Most Common Educational CBA Studies
• Preschool programs
• Dropout prevention programs
• Fine Arts education programs
• State-specific investments in education,
particularly in Minnesota and California
• Issues surrounding grade retention
• Improving high school graduation rates
• Reduction in class sizes
A CBA of Universally-Accessible PreKindergarten Education in Texas
• Conducted by The Bush School of Government and
Public Service in May, 2006.
• Based on findings that if the state continued the
current path, by 2040 the proportion of households
living in poverty would increase by 4 percent and
household income would decrease by $6,500.
• The proposed program contains 50 policy
recommendations covering effective infrastructure,
quality standards, and families and communities
that should be implemented over a ten-year period.
A CBA of Universally-Accessible Pre-Kindergarten
Education in Texas: Conclusions
• Upgrading the Texas educational system is an
obvious solution to labor quality problems.
• Pre-kindergarten is one of the most costeffective educational investments the state can
make.
• Program participants benefit from increased
graduation and retention rates and increased
lifetime earnings.
• Mothers of participants also receive increased
lifetime earnings and increased income.
A CBA of Universally-Accessible Pre-Kindergarten
Education in Texas: Conclusions
• Benefits to the State of Texas are lower juvenile
crime, less child abuse, and increased tax revenue.
• The benefits of pre-kindergarten are particularly
large for children from low-income and minority
households.
• The state would only need to spend an additional
$2,724.42 per pupil when upgrading and expanding
the program so that 80% of all four-year-olds in the
state are enrolled in a high-quality public or private
pre-kindergarten program.
A CBA of Universally-Accessible PreKindergarten Education in Texas
70%
Enrollment
80%
Enrollment
90%
Enrollment
Program Costs
-$5,268.00
-$5,446.00
-$5,585.00
Total Benefits
$18,462
$18,462
$18,462
Rate of Return
$3.50
$3.39
$3.31