Economic Evaluation of Public Policy and Programs

1. Economic Evaluation of Public Policy and Programs Course Overview ECON 4140 Fall 2010

2. Objectives of the course • This course will apply economic theory and statistics to the evaluation of economic policy and programs. • Economic policy/programs include • Spending on public infrastructure (roads, bridges, hospitals, etc.) • Spending on programs (environmental protection, training unemployed, vaccinations for H1NI, ) • Regulations • Social marketing (health warnings on cigarettes, temperature set-backs on thermostats • The analytical structure comprises what is known as cost-benefit analysis.

3. Course components • Cost-benefit/cost-effectiveness analysis • Measuring and valuing program impacts • The political economy of cost-benefit analysis

4. Part 1: Theoretical foundations of cost benefit analysis and cost effectiveness analysis • Overview of economic programs and policy • Time value of money • Risk and uncertainty • Option and existence values

5. Part 2: Measuring and valuing impacts • Experimental and quasi experimental design • Net impact evaluation • Review of net impact evaluations • Key evaluation methods (qualitative and quantitative) • Performance measurement and monitoring

6. Part C: The political economy of cost-benefit analysis • Distributional issues)

7. Discussion questions Imagine you had been asked to provide advice to the government on the following policies. • First, what is your opinion? Why? • Now how you would frame the problem and what evidence is needed to support your conclusion? • What are arguments for an opposite policy? What evidence would support that view? • What issues of fairness exist, if any?

8. Policy proposals • Making university free • requiring repayment of costs through an income tax surcharge • Requiring no repayment • Offering to pay everyone in the workforce a $50 subsidy to take a flu shot every year. • Increasing the price of gasoline by 1¢/liter each month for the next 2 years and: • Placing the proceeds in general revenue or • Devoting the proceeds to energy conservation and pollution control technologies • Subsidizing those who purchase fuel efficient vehicles

9. The beginning

10. … divide half a sheet of paper by a line into two columns; writing over one Pro and over the other Con. Then during the three of four days consideration I put down under the different heads, hints of the different motives that at different times occurred to me, for and against the measure. When I have thus got them all together, I endeavour to estimate the respective weights; and where I find two or three equal, I strike them both. If I find a reasons pro equals two reasons con, I strike out the three. If I find two reasons con equal to some three reasons pro, I strike out the five; and thus proceeding I find at length where the balance lies; and if after a day or two or farther consideration, nothing new that is of importance occurs on either side, I come to a determination accordingly. And although the weight or reasons cannot be take with the precision of algebraic quantities, and yet when each is thus considered, separately and comparatively, and the whole lies before me, I think I am able to judge better and am less liable to make a rash step. Benjamin Franklin, 1772

11. CEA and CBA: a quick tour

12. Types of CBA • Ex-ante CBA attempts to project costs and benefits forward to support decision-making…it is most useful for planning and ranking alternative spending • Ex-post CBA provides insights after the project and may determine value for money, servng as a guide for future policy.

13. Example 1 :Vaccination programs for employees • Three vaccine programs are being evaluated for cost effectiveness. • Outcomes include: • Sick days • Total number of employees affected • The program with the lowest number of sick days per dollar cost is the most cost effective in terms of outcomes. • The key assumption is that the three programs are essentially similar. No program has a markedly different profile in terms of adverse impact; theonly difference is efficacy.

14. Example 2: CEA Training interventions A common goal for many training interventions is the return to work. CEA compares the costs of reaching the same outcome by alternative methods. Typical examples of outcomes include: • Return to work for six months • Hours of work after the intervention • Number of trainees who become employed • Wages after training • Post intervention Employment Insurance benefit

15. A fast tour of CBA • CBA compares investments – especially those in the public domain - using economic concepts of social welfare. • CBA is rooted in economic theory. • The welfare of stakeholders emerges from the comparisons of utility for individual stakeholders as revealed by their preferences and valuations. • Stakeholder choices in the market reveal their preferences and become the guide for how to increase (maximize) their welfare.

16. Key assumptions of CBA • Society is composed of individuals who are free to make choices (such as how much they work), and social welfare is the simple sum of individual welfare. • People are the best judges of their welfare (consumer/producer sovereignty). • Changes in individual welfare are measurable by the willingness to pay for something.

17. The main features of cost-benefit analysis • Cost-benefit analysis includes all social benefits and costs. • It sums the values of an investment across all users • It must translate change in welfare into a dollar amount. This can include benefits such as: • Avoided harms (deaths from disease) • Lost wages due to inability to work • Value of time saved. • This creates an inevitable value (political) perspective for CBA.

18. CBA uses money to measure everything The main advantage of using money to value outcome is that all outcomes may be included. This is a major advantage over CEA Many non-economists are uncomfortable with the main steps in CBA: • Translating all benefits and costs into money. • Comparing the changes in welfare among different groups. • Decisions favour majority rule and those with the greatest willingness to pay, regardless of personal circumstances. • Participants in the economy appear to count more than those who do not (the benefits for those earning a wage may appear to count more than the benefits for those who are unemployed, such as children, retired persons, students, etc.)

19. Example 1 – Traffic congestion Overpass: A new suburban subdivision is created beyond a main east/west transcontinental rail line. With 2,000 new households, new retail malls, and a main road linking north and south Winnipeg, traffic delays caused by rail traffic cause substantial delays. Option 1: Create an overpass at a cost of $30 million Option 2: Impose restrictions on rail traffic CBA compares the ratio of benefits to the costs for each option, as well as the “hidden” option of doing nothing.

20. Because CBA needs to express all benefits and costs as a dollar value, simplifying assumptions must be used. These assumptions can dramatically alter a CBA. Careful peer review requires a team approach to create a valid CBA. Translating benefits into $

21. Benefit Reduced short-term cost due to illness Reduced long-term cost for caring for the small number of catastrophic incidents Averted loss of incomes for those who are disabled/dying Averted costs of lost time at work and play. Cost Vaccination program Economic loss for the small number who experience adverse reactions to vaccine. Example 2 – Vaccination programs

23. Steps in a CBA Enumerate costs and benefits Value the costs and benefits Comparing costs and benefits

24. Appendix 1: Case study

25. Taking Charge! – A training program for single parents on social assistance Taking Charge! was a pilot program jointly funded by HRDC and the Manitoba government. It focused on offering a range of supports for single parents on income assistance. Key features included: • High level of support (daycare, counseling, basic education, volunteer experience, job placement, etc.) • The program recruited IA clients, performed employability assessments, developed tailored training programs, contracted with service providers to delivery the training, and supported job placement. http://www.hrsdc.gc.ca/en/cs/sp/hrsdc/edd/reports/1999-000448/sp-ah109-e.pdf

26. Cost-benefit model Basic for comparison: • “Control” group (Income assistance – welfare clients who have never taken a training program) • “Comparison” group (Income assistance participants in four other training interventions) • “Program” group (Taking Charge!)

27. Nature of the CBA The outcome of interest is whether TC! participants return to work faster than those on Income Assistance and whether a TC! “grad” has a “better” employment outcome. Better is defined as • Higher wages • Longer employment stints • Fewer stints on income assistance We addressed this question using regression analysis and survival analysis.

29. Costs summary for Taking Charge!