PPA 691 – Policy Analysis
Lecture 7a-8a. Benefit-Cost
Analysis
Types of Benefits and Costs
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Inside (internalities) versus outside
(externalities) benefits and costs. Focused
on target group or jurisdiction.
Tangible (directly measurable) versus
intangible (indirectly measurable) benefits
and costs. Focus on known market prices
or shadow price estimates.
Types of Benefits and Costs
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Direct (primary) versus indirect (secondary)
benefits and costs. Focuses on most highly
valued program objectives.
Net efficiency versus redistributional
benefits. Focuses on increases in net
social welfare or transfers within society.
Tasks in Benefit-Cost Analysis
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Problem structuring – formulation of the
metaproblem by defining boundaries of
goals, objectives, alternatives, criteria,
target groups, costs, and benefits.
Specification of objectives – conversion of
general aims (goals) into temporally specific
and measurable aims (objectives).
Tasks in Benefit-Cost Analysis
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Information search, analysis, and interpretation –
Location, analysis, and interpretation of information
needed to forecast the outcomes of specified policy
alternatives.
Identification of target groups and beneficiaries –
listing of all groups (stakeholders) that are a target
of action (e.g., regulation) or inaction (status quo),
or which will benefit from action or inaction.
Tasks in Benefit-Cost Analysis
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Estimation of benefits and costs –
Estimation in units of monetary value the
specific benefits and costs of each
alternative in all classes.
Discounting of benefits and costs –
conversion of monetary benefits and costs
into their present value on the basis of a
specified discount factor.
Tasks in Benefit-Cost Analysis
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Estimation of risk and uncertainty – use of
sensitivity and a fortiori analysis to estimate
probabilities that benefits and costs will occur in the
future.
Choice decision criterion – choice of criterion for
selecting among alternatives: Pareto improvement,
net efficiency improvement, distributional
improvement, internal rate of return.
Tasks in Benefit-Cost Analysis
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Recommendation – Selection of
alternative that is most plausible,
considering rival ethical and causal
hypotheses.
Methods and Techniques for
Recommendation
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Objectives mapping.
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Create objectives tree to identify goals, primary objectives, and subobjectives.
Value clarification.
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Identify all relevant objects of a policy or program.
Identify all stakeholders (include yourself).
List the value premises that underlie each stakeholder’s commitment to objectives.
Classify value premises into those that are simply expressions of personal taste or
desire (value expressions), those that are statements of about the beliefs of
particular groups (value statements), and those that are judgments about the
universal goodness or badness of the actions or conditions implied by the objective
(value judgments).
Further classify value premises into those that provide a basis for explaining
objectives and those that provide a ground for justifying objectives.
Methods and Techniques for
Recommendation
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Value critique.
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Identify one or more advocative claims
(recommendations).
List all stakeholders.
Describe each stakeholder’s argument for and against the
recommendation.
Identify each element in the debate: I, C, Q, W, B, R.
Assess the ethical persuasiveness of each argument and
determine whether to retain, alter, or reject the
recommendation.
Methods and Techniques for
Recommendation
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Cost element structuring.
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1. Primary direct costs
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One-time fixed costs.
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Research.
Planning.
Development, testing, and evaluation.
Investment costs.
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Land.
Building and facilities.
Equipment and vehicles.
Initial training.
Methods and Techniques for
Recommendation
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Cost element structuring.
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1. Primary direct costs
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Recurring (operating and maintenance) costs.
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Salaries, wages, and fringe benefits.
Maintenance of grounds, vehicles, and equipment.
Recurrent training.
Direct payments to clients.
Payments for extended support services.
Miscellaneous materials, supplies, and services.
Methods and Techniques for
Recommendation
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Cost element structuring.
– 2. Secondary (indirect) costs.
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Costs to other agencies and third parties.
Environmental degradation.
Disruption of social institutions.
Other.
Methods and Techniques for
Recommendation
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Cost estimation – provides information
about the dollar value of items in a
cost element structure.
– Typically estimates unit costs.
Methods and Techniques for
Recommendation
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Shadow pricing.
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Comparable prices – comparable or similar items in the market.
Consumer choice – observing consumer behavior in situations
where consumers are forced to choose between a given
intangible and money.
Derived demand – Intangibles valued by indirect costs paid by
visitors.
Survey analysis – Surveys indicate at what level of costs
respondents will be willing to pay for a given service.
Cost of compensation – Intangibles valued by finding prices for
actions required to correct problems.
Methods and Techniques for
Recommendation
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Constraint mapping (used with objectives
mapping).
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Physical constraints.
Legal constraints.
Organizational constraints.
Political constraints.
Distributional constraints.
Budgetary constraints.
Methods and Techniques for
Recommendation
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Cost internalization.
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Production-to-production spillovers (products used affect
products used by others).
Production-to-consumption spillovers (products affect
consumption by others).
Consumption-to-consumption spillovers (consumption
affects consumption by others).
Consumption-to-production spillovers (consumption
affects production elsewhere).
Methods and Techniques for
Recommendation
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Discounting (selection of an
appropriate rate).
– Private discount rates.
– Social discount rates (usually lower than
the private rate).
– Government discount rates.
Methods and Techniques for
Recommendation
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Sensitivity analysis.
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Alternative assumptions about costs.
Projections of costs.
Alternative discount rates.
A fortiori analysis.
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Resolve uncertainty in favor of a weaker
alternative to see if the stronger alternative still
trumps it.
Methods and Techniques for
Recommendation
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Plausibility analysis.
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Invalidity (wrong causal model).
Inefficiency (in estimates).
Ineffectiveness.
Exclusion (missing costs and benefits).
Unresponsiveness (decisions may not be flexible).
Illegality (illegal recommendation).
Unfeasibility (ignores constraints).
Inequity (recommendation is unfair to some group).
Inappropriateness (Unethical to consider recommendation).
Misformulation (wrong definition of the problem).