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Cost-utility analysis

The evaluation process is indeed an indispensible part of any program. This is applicable in almost all fields of knowledge and expertise like medicine, architecture, social services and the government itself nonetheless. Aside from being an important aid for the program implementation process to be systematic, it also helps ensure program’s success in meeting its objectives since it discusses details of the project and provides a sheer perspective on its entirety since the planning phase. In every project, two things that are considered vital are costs and benefits.

These are two important issues during planning, implementation and evaluation as well. This paves the way for the cost-benefit analysis (CBA) to be instituted and widely recognized. Considering this, one should bear in mind that costs and benefits are also broken down into several categories. These include direct and indirect, marginal, fixed and variable, and, tangible and intangible. Direct benefits and costs are those that are directly linked to the project’s main objective while indirect benefits and costs are the byproduct, multipliers, spillovers, or effects of investing on the project or program.

Compared to the total costs and benefits, marginal cost is just the incremental cost of producing the output while marginal benefit is the incremental benefit generated by the output. This factor is important in analysis because it helps in making decisions whether or not to continue the project especially in period of uncertainty. Since this affects marginal cost and benefits, fixed and variable costs should be considered as well. To define it, fixed costs are those that do not vary with the size of the program and is the exact opposite of variable costs characterized by timely changes as the project proceeds.

The last differentiation of cost and benefits knows whether it’s tangible or intangible. Tangible benefits and costs are those that can be converted into monetary value if appraised while intangible solely relies on the impact it makes to the subjects of the program. Because the latter is hard to be graphed using CBA, many resorted to cost-effectiveness analysis (CEA) to exemplify data. Within the duration of the project or program evaluation, CBA and CEA form an integral part towards its completion.

Cost-benefit analysis is an applied technique in economics which attempts to assess a particular program or project. This determines the full cost of the program and weighs it against the value of benefits in a given monetary conversion. The best desirable outcome after CBA is a positive value, which can be achieved if benefits weigh more than the costs. Positive CBA result also generates positive perspective on the program on hand. In the private sectors, cost-benefit analysis is similar to financial analysis which is the first step done before any potential investment opportunities are considered.

With respect to government-proposed programs, CBA answers public queries on the benefits of the program to the welfare society and it also finds out whether it weighs more compared to other alternative uses of the government funds. The significance of CBA in this area is at par or probably outweighs the financial analysis in the private sector because the money used came from public funds thru taxes. The failure in government program would affect majority in the populace, and worst, would probably invoke chaos if not properly implemented.

Compared to CBA, CEA is somehow the same in many of its aspects. The only clear difference between the two is that CBA focuses more on monetary value while CEA focuses on the general effect of a program to the public. Cost-effectiveness analysis is a stand-alone evaluation tool but somehow in most cases a precursor to cost-benefit analysis. CEA proves to be especially useful when the objective of the program are singular or sufficiently related so that the relationship between objectives are clear.

Despite its uses, CEA comes with two major disadvantages compared to cost-benefit analysis. First, unless the evaluator assign weights to each benefit to obtain a common denominator for comparison purposes, the comparison may be less useful to decision makers. Second, it does not produce a fixed numeric data explaining whether benefits exceeded costs or cost exceeded benefits. Now in the evaluation process, an analyst may face problem in appraising the benefits of a program.

Among these variable benefits are cost avoidance or cost saving, value of time and lives, increased productivity, recreational values and taxes, optional or existence values, and land values. Aside from these, other issues common to cost-benefit and cost-effectiveness analyses have caught evaluator’s attention especially when it comes to government’s programs. These include the choice of an appropriated discount, spillovers and unintended effects of government actions, concerns on equity, and sensitivity analysis.

In general, CBA and CEA are just guidance for decision makers in the implementation of a certain project. It provides an accurate framework of benefits and costs, giving out wealth of information which aids on which better decision can be made. Meanwhile, one important form of program evaluation is economic evaluation. It has served as an encompassing term used in several economic analyses. Managers should be well acquainted with different types of economic evaluations so they can make informed choices. Understanding this well is beneficial in making decisions about future programs.

Program economic evaluation requires several steps in the process. These include definition of the problem, stipulation of comparison parameters, development of decision rules, selection of accounting perspective, computation of program costs and effects, adjustment of time, identification and measurement of program effects, and analysis. The most important and common among all steps is the conduction of analysis where cost-effectiveness analysis and cost-benefit analysis have found its place again in terms of use.

Added to the two is cost utility analysis. Cost-utility analysis measures the outcome of a program in terms of the subjects’ potential preference for the outcome. Programs are compared on the basis of their cost per unit of preference, called utility. The result of program economic evaluation, like any other analysis, should undergo scrutiny. Good economic analysis should take into account adjustments for time, which includes discounting, inflation, and depreciation.

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