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Research Report

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Current public policy is based on two fundamental principles: equity and efficiency. Equitable programs contribute to balancing the needs and desires of the various groups in society; whereas efficient programs are those that serve to increase the net value of goods and services available to society. Benefit-cost analysis is a tool developed to determine whether a program produces effects that justify the costs incurred to operate the program. The benefit-cost model presented in this monograph requires the reader to:

  1. Understand the concept of an analytical perspective;
  2. Move beyond viewing benefit-cost analysis as a simple ratio of benefits to costs;
  3. Include both monetized and non-monetized benefits in the analysis; and
  4. Consider what is a benefit and what is a cost, and to whom.

Thus, potential users of the proposed model are encouraged to take a broader perspective on the benefits and costs of a program, intervention, or service, rather than reducing the analysis to a simple ratio of benefits to costs. The purpose of benefit-cost analysis is to determine whether a program's benefits outweigh its costs. The primary issue addressed by a benefit-cost analysis is whether the impacts of a program, intervention, or service are big enough to justify the costs needed to produce them. Benefit-cost analysis depends upon the availability of cost estimates, benefits to program participants, and impact statements, which are the statistically significant mean differences of costs and benefits between the programs, interventions, or services being compared.

Benefit-cost analysis requires both an understanding and use of a number of terms. The more important of these include:

  • Benefits: Positive outcomes that accrue to program participants such as increased wages, regular job, or reduced use of alternative programs.
  • Costs: Expenditures associated with a particular program, intervention, or service such as program expenses, forgone market output (that is, opportunity costs), or increased use of complementary programs.
  • Efficiency: The extent to which there is an increase in the net value of goods and services available to society (that is, being productive with minimum waste).
  • Equity: The balance between the needs and desires of the various groups in society (that is, fairness).
  • Impacts: The significant mean differences on selected cost and benefit measures between the groups or conditions being compared.
  • Monetized: Benefits or costs to which a monetary value can be assigned (for example, wages, taxes paid, reduced public taxes).
  • Nonmonetized: Benefits to which a monetary value cannot be assigned (for example, improved quality of life or increased satisfaction).
  • Analytical perspective: Benefit-cost analysis addresses the perspective of different groups in society that are effected by a program, service, or intervention. The three perspectives used in the benefit-cost model presented include the participant, rest of society (that is, the "taxpayer"), and social (that is, "society as a whole," which includes the sum benefits and costs generated from the previous two perspectives). The inclusion of these three perspectives in a benefit-cost analysis is necessary since a program effect (such as taxes withheld) can be a benefit to some and at the same time a cost to others.

The benefit-cost analysis model presented on subsequent pages is based on the work of Conley & Noble (1990), Cimera (1998), Cimera and Rusch (1999), Kerachsky et al (1985), Noble & Conley (1987), Rossi, Freeman & Lipsey (1999), Rusch (1990), Rusch, Conley & McCaughlin (1993), Schalock (1995), Schalock and Thornton (1988), Thornton (1984), and Thornton and Maynard (1989).



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