Chapter 11: Measuring Efficiency

1. Chapter 11:Measuring Efficiency Created By Kelly Sommerfeld

2. Introduction to Chapter 11 • What are some examples of common resource allocation dilemmas faced by planners, funding groups, and policymakers?

3. Cost-Benefit vs. Cost-Effectiveness • Cost - Benefit: The outcomes of programs are expressed in monetary terms. • Cost-Effectiveness: The outcomes are expressed in substantive terms.

4. Key Concepts in Efficiency Analysis • What is the value? • What are the limitations?

5. Ex Ante and Ex Post Efficiency Analyses • Most commonly undertaken: • Prospectively during the planning and design phase of an initiative (ex ante efficiency analysis) • Retrospectively, after a program has been in place for a time and has been demonstrated to be effective by an impact evaluation, and there is interest in making the program permanent or expanding it (ex post efficiency analysis)

6. Cost-Benefit Analysis • Requires estimates of the benefits of a program and estimates of the costs of undertaking the program. • Requires the adoption of a particular economic perspective • Least controversial when applied to technical and industrial projects. • Attempt to value both inputs and outputs at what is referred to as their marginal social values.

7. Cost-Effectiveness Analysis • Requires monetizing only the program’s costs. • Benefits are expressed in outcome units. • Efficiency is expressed in terms of the costs of achieving a given result.

8. Conducting Cost-Benefit Analyses • Assembling Cost Data • Sources of Cost Data: • Agency fiscal records • Target cost estimates • Cooperating agencies • Accounting Perspectives • Individual participants or targets • Program sponsors • The communal social unit involved in the program

9. Measuring Costs and Benefits • What are the problems? • Identifying and measuring all program costs and benefits • Difficulty of expressing all benefits and costs in terms of a common denominator (meaning translating them into monetary units)

10. Monetizing Outcomes • Money measurements • Market valuation • Econometric estimation • Hypothetical questions • Observing political choices In summary, all relevant components must be included if the results of a cost-benefit analysis are to be valid and reliable and reflect fully the economic effects of a project.

11. Vocabulary To Know • Shadow Prices • Opportunity Costs • Secondary Effects • Distributional Effects • Discounting

12. Final Step in Cost-Benefit Analysis • Comparing total costs to total benefits • Most direct way is by subtracting costs from benefits after appropriate discounting • Example: Program may have costs of $185,000 and calculated benefits of $300,000. In this case, the net benefit is $115,000.

13. Conducting Cost-Effectiveness Analyses • Based on the same principles and uses the same methods as a cost-benefit analysis. • Contrast though is that the analysis does not require that benefits and costs be reduced to a common denominator. • Programs with similar goals are evaluated and their costs compared. • Efficiency is judged by comparing costs for units of outcome.

14. Summary • Efficiency analyses: Provide a framework for relating program costs to outcomes. • Cost-Benefit analyses: Directly compare benefits to costs in monetary terms. • Cost-Effectiveness analyses: Relate costs expressed in monetary terms to units of substantive results achieved.

15. Resource • Rossi, Peter H., Lipsey, Mark W., Freeman, Howard E. (2004). Evaluation: A Systematic Approach. Thousand Oaks, California: Sage Publications, Inc.