ABSTRACT
Previous chapters have outlined three commonly used evaluation techniques, costbenefit analysis (CBA), cost-effectiveness analysis (CEA), and cost-utility analysis (CUA). They are all used to assist in decision-making. It might be thought that this involves only undertaking the calculations and then applying a decision rule. For example, the simplest rule in CBA is to proceed in all cases where CBA gives a positive net present value. According to the criterion, this means that in each approved case benefits exceed costs, so a net gain to society is achieved. However, it may not be desirable to rely solely on such a decision rule. The rule can result in poor
10.1 Introduction .................................................................................................. 133 10.2 Steps in the Analysis ..................................................................................... 134 10.3 Potential Problem Areas ............................................................................... 135
10.3.1 Discounting ....................................................................................... 135 10.3.1.1 What Discount Rate? ......................................................... 136 10.3.1.2 First-Best and Second-Best Solutions ................................ 138
10.3.2 Discounting Non-Monetary Units .................................................... 139 10.3.2.1 Is it Meaningful to Add Up Quantities? ............................. 139 10.3.2.2 What Do Discounted Quantities Mean? ............................ 140 10.3.2.3 What Discount Rate Should Be Used?, .............................. 141
10.3.3 Measuring Preferences ..................................................................... 143 10.3.3.1 Whose Preferences? ........................................................... 143 10.3.3.2 The Role of Process and Persuasion .................................. 144
10.4 Concluding Comments ................................................................................. 146 Appendix ................................................................................................................ 146
A.1 Discounting ....................................................................................... 146 References .............................................................................................................. 147
decisions when there are mutually exclusive alternatives.* In addition, there may be reservations about the distributional effects of the approach. These arise because gains and losses are simply added up to get a net present value. Some people may gain a lot, while others may lose. We may be concerned about the actual allocation of costs and benefits, rather than just their totals.†
Briefly, then, a purely mechanical approach may not be satisfactory. The technique and the decision rule may not always give the best answer. Also, in a democracy it might be considered important that the final decision be left to elected representatives. In other words, the actual process of policy making/decision-making may be important.‡ In recent decades an emphasis on “evidence-based policy” would suggest a mix of analysis and political input, with the former serving to inform the latter. While noting this point, this chapter will focus on some problems in analysis.
