Lecture7_3509 - Cost Effectiveness Analysis (CEA) CEA aims...

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1 Cost – Effectiveness Analysis (CEA) CEA aims at identifying the least-cost strategy for achieving a non-economic objective Involves comparing the costs of various technically feasible project options and selecting the one with that provides the lowest costs for a given outcome, i.e. the most cost-effective one.
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2 Cost-Effectiveness Ratio (CE ratio) Used for ranking projects Costs are measured as always Benefits measured in non-monetary units, e.g. # of children immunized, # of students enrolled Consider a health project. The CE ratio of the project is: Cost of project (in $) ratio = Benefit of project (in, for example, # of deads prevented) CE
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3 Cost-Effectiveness Ratio (CE ratio) Often, costs and benefits are compared to status quo, or current practice, so: Cost project - Cost current practice ratio = Benefit project - Benefit current practice CE
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4 Example: education Objective: increase mathematical skills of students Project Options and Costs: 1) remedial groups with special instructor cost per student: $300 2) self-instructional program supported with specially designed materials cost per student: $100 3) computer-assisted instruction, cost per student: $150 4) peer tutoring , cost per student: $50 Benefits: students improve mathematical skills under the different measurements. This is measured by (average) improvements in test scores as follows: 1) remedial groups with special instructor 20 points 2) self-instructional program 4 points 3) computer-assisted instruction, 15 points 4) peer tutoring , 10 points Which is the most cost-effective option?
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5 Example: education 1) remedial groups with special instructor CE ratio = 300/20 = 15 2) self-instructional program 100/4 =25 3) computer-assisted instruction, 150/15 = 10 4) peer tutoring , 50/10 = 5 Peer tutoring is the most cost-effective intervention.
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6 Benefits and Costs over time Consider a new educational project requiring capital expenditures (e.g. new school) Capital costs are typically higher in the initial years, and enrollment and graduation are typically higher once the project is working at full capacity. Comparison of costs and benefits occurring at different points in time is necessary What to do?
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7 Discounting The analysis can discount the benefit and costs flows and compare them at a single point in time. If benefits are measured in number of students enrolled, shall those benefits be discounted as well? Probably yes. CE analysis in this case uses students as a proxy of a monetary benefits. And, monetary benefits need to be discounted. Note: if you do not discount, you are indifferent between two projects having the same costs, but the first one graduates 100 students today, and the second one, graduates 100 students in 20 years. The first project is clearly better.
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8 Weighted Cost-Effectiveness Analysis Sometimes there are projects with multiple outcomes
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This note was uploaded on 05/27/2010 for the course ECON ECON 3509 taught by Professor Pablo during the Winter '09 term at Carleton CA.

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Lecture7_3509 - Cost Effectiveness Analysis (CEA) CEA aims...

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