Wk 5_: Becoming an Effective Consumer of

Cost-Benefit Analyses
Concept Review

Course GSG 331: Public Policy Making in Bangladesh

1
Shanawez Hossain Ph.D.
Assistant Professor
Global Studies and Governance (GSG)
Independent University, Bangladesh (IUB)
 Cost-Benefit Analysis: Definition
A systematic way of
tallying the pros and cons
of a particular policy
option.
 Cost-Benefit Analysis
Examples of your experience with CBA:
–Establishment of new school for girls (John Smith)
–Transitioning to paperless office (Jane Doe)
 Cost-Benefit Analysis and Market Failures
CBAs are often used to
assess whether government
intervention to address
market failures will improve
outcomes overall
 Cost-Benefit Analysis and Market Failures
Examples of market failures in your work
–Lack of information on market prices among rural
farmers (John Smith)
–Emissions from coal fired power plant (Jane Doe)
What type of market failure does each of these
examples represent?
 Cost-Benefit Analysis: Steps
1. Identify the relevant costs and benefits
2. Project the costs and benefits
3. Monetize the costs and benefits
4. Discount future costs and benefits
5. Aggregate up to net benefits
6. Consider distribution of impacts
 Cost-Benefit Analysis: Steps
1. Identify the relevant costs and benefits
2. Project the costs and benefits
3. Monetize the costs and benefits
4. Discount future costs and benefits
5. Aggregate up to net benefits
6. Consider distribution of impacts
Step 1: Identify the relevant costs and benefits
Benefits you identified:
• “Increased life expectancy”
• “Reduction in spending in health
sector”
• “Resources spent on buying
cigarettes can be allocated to
other products”
Step 1: Identify the relevant costs and benefits
Costs you identified:
• “Additional cost of printing
graphics on the cigarette packets.”
• “Reduction in tax collection”
• “The laying off of the workers
in the tobacco industry”
 Cost-Benefit Analysis: Steps
1. Identify the relevant costs and benefits
2. Project the costs and benefits
3. Monetize the costs and benefits
4. Discount future costs and benefits
5. Aggregate up to net benefits
6. Consider distribution of impacts
 Step 2: Project the costs and benefits
• Costs and benefits must be projected
relative to a well-defined alternative
– A benefit of the cigarette label rule is the
number of quality-adjusted life years
saved relative to what would have
happened had the policy not been
implemented
– This could also be phrased as, the
number of QALYs saved relative to the
counterfactual
 Cost-Benefit Analysis: Steps
1. Identify the relevant costs and benefits
2. Project the costs and benefits
3. Monetize the costs and benefits
4. Discount future costs and benefits
5. Aggregate up to net benefits
6. Consider distribution of impacts
 Step 3: Monetize the costs and benefits
• Monetization allows us to compare
both financial and non-financial
costs and benefits
• What about when costs and
benefits in terms of life expectancy
are considered?
 Step 3: Monetize the costs and benefits
• Quality Adjusted Life-Year (QALY) • Value of a Statistical Life Year
– Recognizes that we value quality of (VSLY)
life as well as length of life – Not the same as the value of an
– An additional year in perfect additional year of life for a specific
health is worth more than an person
additional year in poor health – Calculated indirectly by looking at
how much money we demand (or
spend) to increase (or reduce) our
risk of death slightly
 Cost-Benefit Analysis: Steps
1. Identify the relevant costs and benefits
2. Project the costs and benefits
3. Monetize the costs and benefits
4. Discount future costs and benefits
5. Aggregate up to net benefits
6. Consider distribution of impacts
 Step 4: Discount future costs and benefits
• Social Discount Rate
– Converts future dollars into present
dollars, taking into account that the
value of money usually grows with
time
– A higher discount rate means that
future benefits and costs are worth
less in present dollars
 Cost-Benefit Analysis: Steps
1. Identify the relevant costs and benefits
2. Project the costs and benefits
3. Monetize the costs and benefits
4. Discount future costs and benefits
5. Aggregate up to net benefits
6. Consider distribution of impacts
Step 5: Aggregate up to net benefits
 Cost-Benefit Analysis: Steps
1. Identify the relevant costs and benefits
2. Project the costs and benefits
3. Monetize the costs and benefits
4. Discount future costs and benefits
5. Aggregate up to net benefits
6. Consider distribution of impacts
 Step 6: Consider distribution of impacts
• Net present benefits does not say
anything about how benefits and
costs are distributed
• Most policies create winners and
losers
 Asking Critical Questions

1. Costs and Benefits: Are all the most important costs and benefits
included?
2. Internal Validity: Are the costs and benefits estimated based on
true program or policy impacts?
3. Distribution: Is the distribution of costs and benefits an
important consideration?
4. External Validity: To what extent does the analysis apply to
my context?
 Asking Critical Questions
Your assessments of the external validity of the cigarette warning
label example:
– Warning labels are very helpful because in our country because literacy
rate is lower than in U.S. but labels are understood by all (John Smith)
– Warning labels may be replicated on some other generalized issue like
conserving water, conserving energy, etc. (Jane Doe)
THANK YOU