How can you analyze public policies and programs for efficiency?

3 What is discounting?

Discounting is a technique that converts future costs and benefits into present values, reflecting the fact that people prefer to receive benefits sooner rather than later, and to pay costs later rather than sooner. Discounting takes into account the time value of money, which is the interest rate that people can earn or pay by investing or borrowing money. To discount future costs and benefits, you need to apply a discount rate, which is the percentage by which you reduce the value of future costs and benefits for each year. The higher the discount rate, the lower the present value of future costs and benefits.

4 What is cost-benefit analysis?

Cost-benefit analysis (CBA) is a method that compares the total discounted costs and benefits of a policy or program over a given time period, usually called the horizon. CBA calculates the net present value (NPV) of a policy or program, which is the difference between the total discounted benefits and the total discounted costs. If the NPV is positive, it means that the policy or program is efficient, as it generates more benefits than costs. If the NPV is negative, it means that the policy or program is inefficient, as it generates more costs than benefits. CBA also calculates the benefit-cost ratio (BCR), which is the ratio of the total discounted benefits to the total discounted costs. If the BCR is greater than one, it means that the policy or program is efficient, as it generates more benefits per dollar of cost. If the BCR is less than one, it means that the policy or program is inefficient, as it generates less benefits per dollar of cost.

5 What are the limitations of cost-benefit analysis?

Cost-benefit analysis is a useful tool for analyzing public policies and programs for efficiency, but it also has some limitations and challenges. One limitation is that some costs and benefits may be difficult to quantify or monetize, such as the value of human life, health, happiness, or environmental quality. Another limitation is that some costs and benefits may be uncertain or contingent on future events, such as the impact of climate change, technological innovation, or social change. A third limitation is that some costs and benefits may be distributed unevenly across different groups of people, regions, or generations, raising issues of equity and justice. These limitations require careful assumptions, sensitivity analysis, and ethical judgment when conducting and interpreting cost-benefit analysis.

6 What are the alternatives to cost-benefit analysis?

Cost-benefit analysis is not the only method for analyzing public policies and programs for efficiency. Other suitable or complementary methods include cost-effectiveness analysis (CEA), multi-criteria analysis (MCA), and social return on investment (SROI). CEA compares the costs and outcomes of different policies or programs that have a common goal, such as reducing greenhouse gas emissions, while MCA evaluates the performance of different policies or programs based on multiple criteria that reflect the preferences and values of stakeholders. SROI measures the social, environmental, and economic impacts of a policy or program on the stakeholders and assigns a monetary value to these impacts. All three methods can be used to determine the efficiency of public policies and programs.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?