The benefits of a cost–benefit analysis

Allocating resources, goods and services efficiently is vitality important to government.
Cost–benefit analyses can help policy-makers consider consequences and costs when assessing the value of new policy.

Essential to conducting a good cost–benefit analysis is determining what factors must be included. What benefits and costs are relevant? What is the alternative if the policy proposal does not go ahead? And, importantly, how do we quantify costs and benefits of things which do not have a dollar value attached to them?

One example of a complex cost–benefit analysis with a questionable outcome is the Ford Pinto case. In the 70s, Ford’s Pinto model car had a potentially dangerous fuel system—one prone to causing post-accident fires, particularly if the car was rear-ended. When deciding whether to recall the car, Ford determined that the cost of recalling the car was higher than the ‘societal benefit’ of fixing the dangerous system. This was despite discovering that not upgrading the fuel system would cause roughly 180 deaths. Ford saved money initially, however, the company didn’t consider the monetary losses associated with the damage to their brand.

The ethics of Ford’s cost–benefit analysis are incredibly problematic. The issue shows the complexity of conducting a cost–benefit analysis, but also the importance of doing so appropriately. How do you quantify 180 deaths? How do you predict the cost of a damaged reputation? This example highlights how important thorough and accurate cost–benefit analyses are—both as a decision-making tool and as a way to justify decisions.

Cost–benefit analyses are an important tool in making sure that policy makers make sound, evidence-based decisions. Public servants must account for costs that go beyond monetary losses. They must take into account public health, safety and well-being and a myriad of other factors. They must do their best to predict the implications of their decisions.

Our cost–benefit analysis workshop

Ethos CRS is delivering Cost–benefit analysis in policy formulation: a customised, one-day introductory program for analytical and policy officers who want to learn about how to use a cost–benefit framework to inform their policy formulation.

Key concepts of the course include:

  • cost–benefit analysis and its place in evaluating policy
  • stages to generate meaningful results
  • traps and pitfalls—the problems along the way
  • theory into practice: scenario and results.

Participants of the course will gain improved understanding of the principles that underpin the use of cost–benefit analyses, the ability to assess a cost–benefit analysis, the ability to complete a cost–benefit analysis and better understanding of the strengths and weaknesses of cost–benefit analyses.

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