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COST EFFECTIVENESS AND COST
Dr. Mohamed Sheikh Omar Mohamud
MBChB, MPH candidate
COST EFFECTIVENESS ANALYSIS
(CEA) AND COMPARATIVE CEA
Cost-effectiveness analysis measures the ratio of the
costs of a program to the effects it has on one outcome
Measure the cost for a given level of effectiveness:
e.g. cost to increase school attendance by 1 year
Or, measure the level of effectiveness for a given
cost: years of additional attendance induced by
WHEN AND WHY IS CEA USEFUL?
Good option when there is one key specific
outcome of interest, which is often the case in
CBA requires quantifying outcomes that are
difficult to quantify (controversial)
CEA can allows comparison of multiple programs
by comparing impact in terms of one outcome
Helps with decision making, particularly
under a fixed budget (i.e., which will give the
most impact for the least cost?)
CEA REQUIREMENTS AND
Comparative CEA compares the cost-
effectiveness of different programs and requires
impact estimates (for the same outcome) and
information on program costs
Consistent approaches to measuring impact?
Costs to provider and beneficiary?
Sunk vs incremental costs?
Any negative effect on an
organization resulting from
the implementation of the
1. maintenance costs
3. research and development
4. labour costs
A benefit is any positive
effect on the organization
resulting from the
implementation of the
1. increase in productivity
2. reduction in costs
3. Saving Time
4. Decrease road
CONCEPT OF COST – BENEFIT
Cost benefit is a tool which modern financial analysts adopt
before undertaking any financial operation or commercial
The ultimate aim of a business organization is to make
Therefore, any system in the organization must produce more
benefits as compared to its costs for the organization to
survive & prosper.
BENEFITS > COSTSBENEFITS > COSTS
WHAT IS COST BENEFIT
A cost benefit analysis is done to determine how well, or how poorly, a planned
action will turn out.
The analysis relies on the addition of positive factors and the subtraction of
negative ones to determine a net result.
CBA has been established primarily as a tool for use by governments in
making their social and economic decisions.
CBA measures costs and benefits to the community of adopting a
particular course of action e.g. Constructing a dam, by-pass etc.
When investment made commensurates with the benefit derived, it can be said
that operation is positive and viable; but when benefits derived do not
compensate financial investments made, it can be said that it is financially non-
viable and negative.
WHY COST BENEFIT ANALYSIS.???
Cost Benefit Analysis is used to determine:
whether a solution/project is economically feasible
which of two or more projects provides the best return
Other issues :
Is the project worthwhile financially?
Is it the best option?
Should it be undertaken at all?
COSTS & BENEFITS OF INFORMATION
Telecommunications Increased Productivity
Software Low Operating Costs
Personnel Reduced Workforce
Accessories : Lower Computer CostsComputer ink/ribbon Reduced Facility Costs
Services : Increased Organizational
Insurance Improved Decision making
Physical Facilities : Enhanced Employee
Building Increased Job Satisfaction
Furniture Higher Customer
THE GENERAL STEPS FOR COST BENEFIT
1. SPECIFY CLEARLY THE PROJECT OR
The first step is to decide on the perspective from which the study is to be
When we have decided on the perspective on the main elements of the projects
such as, the study of the location, timing, group involved, the connection with
other program, etc, should be considered.
When the project is fixed the following two program are involved:
1.Physical project: These projects are physical in nature, which is done when an
area is polluted. E.g.,: Public waste treatment plans, hazardous waste removal,
2.Regulatory project: This project regulates the amount of pollution in the society.
E.g.,: Enforcement of environmental law and regulation, water disposal
practice, restrictions of land for certain activities, etc.,
2.DESCRIBE QUANTITATIVELY THE INPUTS
AND OUTPUTS OF THE PROGRAMME:
For some projects it is easy to identify the input and output.
For eg.,if we are planning a waste water treatment project, the staffs
of that program will be able to provide a full physical specification
of the plant, together with the inputs required to build it and keep it
However, it is harder to predict the externalities caused by the
disposition of nuclear waste.
Because a restriction on development in a particular area can be
expected to detect development elsewhere into the surrounding
3. ESTIMATE THE SOCIAL COST AND
BENEFIT OF THESE INPUTS AND
The next step is to put values on input and output flows.
(i.e) to measure costs and benefits.
We could do this in any units but in many cases we will be dealing
with effects, especially on the benefit side that are not directly
registered on market.
This means that we try to translate all the impact of the project or
the program in order to make them comparable among themselves
as well as with other types of public activities.
4.COMPARE THESE BENEFITS AND
Next step is to make comparison between cost incurred and
benefit derived from the project.
One of them is to subtract the total cost from the total benefit
to get net benefit.
(Total cost – Total benefit = Net benefit).
If the net benefit is positive then the cost benefit is positive
and if the net benefit is negative then the cost benefit is
Another method is called Cost benefit ratio it is calculated by
taking the ratio of benefit and cost.
COST BENEFIT ANALYSIS:
1. The CBC analysis may be
applicable for both the new as
well as old projects.
2. It is based of accepted social
principle that is on individual
3. This method encourages
development for new techniques
for the evaluation of social
1. The government is not
completely aware of all the cost
and benefits associated with the
2. This approach does not clearly
states that who should bear the
population control cost.
3. The method of collecting data for
this analysis is generally biased.
HOW IS CEA DIFFERENT FROM
CBA: Ratio of costs of program to all identified outcomes
CEA: Ratio of costs of program to one defined outcome
Ratio of cost of education program as a ratio to its impact
on learning, physical and mental health, household
bargaining power, future labour market outcomes,
Ratio of cost of education program as a ratio to its impact
It gives planners a method to try and “put all relevant costs
and benefits on a common temporal footing” in order to help
people make informed decisions.
It provides people with an understanding as to the economic
costs of decisions, and allows arguments to be made for or
against a change based upon economic considerations.
It is a decision-making process that forces the decision maker
to compare all direct and indirect positive and negative effects
of the proposed decision on an objective basis.
A CEA/Comparative CEA is not enough information to make a
policy decision, but it can be a good starting point