Cost-Benefit Analysis

1. Cost-Benefit Analysis Joe Norris EDAD 684: School Finance/Ethics January 19, 2011

2. Cost-Benefit Analysis Defined: Cost-benefit analysis is a term that refers both to: • Helping to appraise, or assess, the case for a project, program, or policy proposal; • An approach to making economic decisions of any kind.

3. Cost-Benefit Analysis Defined: Under both definitions the process involves, whether explicitly or implicitly, weighing the total expected costs against the total expected benefits of one or more actions in order to choose the most beneficial or profitable option. The formal process is often referred to as either CBA (Cost-Benefit Analysis) or BCA (Benefit-Cost Analysis).

4. Closely Related Formal Techniques • Cost-Effectiveness Analysis • Economic Impact Analysis • Fiscal Impact Analysis • Social Return on Investment (SROI) Analysis These slightly different techniques build upon the logic of CBA, but differ in that they are designed to inform the practical decision-making of managers and/or investors focused on optimizing their social and environmental impacts.

5. Theory of CBA • Often used by governments to evaluate the desirability of a given intervention; • Heavily used in today’s government; • An analysis of the cost effectiveness of different alternatives in order to see whether benefits outweigh the costs; • Aim is to gauge the efficiency of the intervention relative to the status quo; • Costs and benefits are evaluated in terms of the public’s willingness to pay for them (benefits) or willingness to pay to avoid them (costs).

6. Theory of CBA • The guiding principle is to list all parties affected by an intervention and place a monetary value of the effect it has on their welfare as it would be valued by them. • The process involves monetary value of initial and ongoing expenses vs. expected return. • Analysts try to estimate costs and benefits either by using survey methods or by drawing inferences from social and market behavior.

7. CBA Specific to Educational Initiatives • The use of educational cost-benefit analysis is now widely accepted and has definite advantages in the “era of accountability.” • Costs are related to benefits from education, the latter being quantified via age-earnings profiles. Rates of return may be social or private. • There have been many CBA studies mostly showing quite high returns to investment in education. • Rates of return are usually higher for primary education than for secondary, higher for secondary than for higher education.

8. CBA Specific to Educational Initiatives:Some Criticisms • Rates of return indicate whether to invest in a particular direction but cannot tell us how much to invest. • How do we adjust for the influence of factors other than education? • Uncertainty regarding future economic conditions; • Failure to allow for educational quality; • Imperfections and fluctuations in labor markets.

9. CBA Alternatives in Education The two main alternatives to CBA in educational planning include “manpower planning” and the “social demand approach”. • Manpower planning assumes a rigid occupational composition of the workforce, that educational background relates directly to occupation, and assumes that jobs are clearly differentiated, all of which may be unrealistic. • The social demand approach focuses on forecasts of future choices by students and their families, especially regarding higher education.

10. Most Common Educational CBA Studies • Preschool programs • Dropout prevention programs • Fine Arts education programs • State-specific investments in education, particularly in Minnesota and California • Issues surrounding grade retention • Improving high school graduation rates • Reduction in class sizes

11. A CBA of Universally-Accessible Pre-Kindergarten Education in Texas • Conducted by The Bush School of Government and Public Service in May, 2006. • Based on findings that if the state continued the current path, by 2040 the proportion of households living in poverty would increase by 4 percent and household income would decrease by $6,500. • The proposed program contains 50 policy recommendations covering effective infrastructure, quality standards, and families and communities that should be implemented over a ten-year period.

12. A CBA of Universally-Accessible Pre-Kindergarten Education in Texas: Conclusions • Upgrading the Texas educational system is an obvious solution to labor quality problems. • Pre-kindergarten is one of the most cost-effective educational investments the state can make. • Program participants benefit from increased graduation and retention rates and increased lifetime earnings. • Mothers of participants also receive increased lifetime earnings and increased income.

13. A CBA of Universally-Accessible Pre-Kindergarten Education in Texas: Conclusions • Benefits to the State of Texas are lower juvenile crime, less child abuse, and increased tax revenue. • The benefits of pre-kindergarten are particularly large for children from low-income and minority households. • The state would only need to spend an additional $2,724.42 per pupil when upgrading and expanding the program so that 80% of all four-year-olds in the state are enrolled in a high-quality public or private pre-kindergarten program.

14. A CBA of Universally-Accessible Pre-Kindergarten Education in Texas