Advantages and difficulties of applying cost-benefit analysis to policy decisions and what defines a good cost benefit analysis

(Note: This reflection paper was written in the first quarter of 2019 as part of a cost-benefit analysis course)

Cost-benefit analysis (CBA) is an analytical framework and tool for comparing the inputs and outputs needed to execute projects or policies so as to estimate their net benefits. The CBA does this by monetizing these inputs and outputs such that they capture existing data and assumptions. A CBA can be conducted before or after a policy has been implemented or project executed; ex-post or ex-ante. There could be multiple assumptions for various costs (inputs) and benefits (outputs), hence, multiple CBA. These CBAs are ranked or compared to decide on the CBA whose parameters would provide guidance for preferred choice of action. The CBA could also serve as reference document during project or policy implementation. In as much that the CBA is an important consideration for project and policy decisions and provides guidance on the financial implications of decisions, it remains a valuable tool.

However, the financial tilt of the CBA makes it problematic. While costs and other inputs can be adequately estimated in monetary terms, benefits are harder to monetize. A common financial metric is needed for a straightforward comparison; to create an apple to apples or a common base for comparison. However, the methodological challenge of quantifying the value of qualitative costs and benefits is huge and being refined by CBA experts. Also, obtaining valid estimates could prove to be an expensive and time-consuming process. This raises concerns of the efficiency of the costs spent in estimating these benefits.

Although, the CBA tries streamline elements included in the analysis by incorporating only direct costs and benefits, identifying and deciding on the costs and benefits to be included in the analysis is also often a source of controversy. The items that make it to the list of benefits considerably influence the outcome of the CBA, such that, it is possible to have different CBA for the same project or policy consideration. While, it is often emphasized that CBA is not an exact science since qualitative decisions, value judgements are made. These value judgements can be subject to diversity of interpretations and manipulated; those who value certain things will overestimate its value and vice versa. This lack of consensus raises questions of reliability of CBA method and leads to debates and concerns about if the CBA considered all necessary costs and benefits. Furthermore, CBA is an aggregate measure and there is often some heterogeneity in the distribution of benefits among different socio-economic classes or geographies which are not captured.

In my opinion, a CBA is only as good as the projection or estimates used in its calculation. Therefore, a good cost-benefit analysis should be objective and employ valid data to justify its estimates. If data not readily available or prone to be a source of controversy, a forced estimate should not be employed. Rather, efforts should be spent in justifying the magnitude of the benefit and how it compares in relation to costs. A good CBA can be obtained without monetizing all benefits. Also, I think the presence of ethical issues in monetizing certain benefits, such as the value of a statistical life, do not detract the value of the CBA. These values are just statistical constructs needed for the purpose of the CBA. That said, the value of life irrespective of the adverb qualifying it should be equally valued worldwide and avoid situations where a policy decision has a go decision in a developed country and a no-go decision in the global south.

In conclusion, let us not overburden the CBA with unwieldy expectations, it is a guide not a stamp.