Draw the distinctions between cost–benefit analysis and cost-effectiveness analysis. Use an example to illustrate their differences.

What will be an ideal response?

Cost–benefit analysis (CBA) and cost-effectiveness analysis (CEA) are both means of analyzing or judging the efficiency of programs. Both are useful for identifying actual or anticipated program costs and comparing them with known or expected program benefits and providing valuable information for efficiency analysis.

CBA compares the benefits of a program with its costs. Benefits and costs, both direct and indirect, are identified and included in the analysis, are quantified and translated into a common monetary unit, and may be projected into the future to reflect the lifetime of a program or discounted to reflect present values. Assumptions may be made to translate particular program elements into monetary figures, and different analyses may be undertaken based on different sets of assumptions. The net benefits are typically used to assess the efficiency of the program, or they may be compared with those of other programs.

CEA also compares the benefits of a program with its costs, but it requires monetizing only the costs and not the benefits. Program benefits in CEA are measured in units of outcome, such as the quality-adjusted life year (QALY), which integrate a measure of quality of health with the duration of survival. CEA assesses the efficacy of a program in attaining its goals or in achieving certain outcomes in relation to the monetary value of resources or costs for implementing the program. CEA is more appropriate than CBA when there is dispute about converting outcomes into monetary values.

The difference between CBA and CEA is related to how program outcomes or effects are expressed. Program outcomes are expressed in monetary terms in CBA, but in nonmonetary or substantive terms in CEA. Whereas CBA compares benefits to costs in monetary terms, CEA compares costs expressed in monetary terms to units of substantive goals achieved. Cost–benefit is concerned with cost relative to output. Cost-effectiveness first assesses the degree to which a program achieves its goals and then examines the efficiency in which it attains its goals.

The use of CBA and CEA is limited. First, the identification of costs and benefits may be incomplete or subject to controversy. Even though efficiency analyses are largely quantitative and rigorous, there is no single correct analysis. Second, the valuation of costs and benefits may be problematic. Controversies may result from placing economic values on particular input or outcome measures. Different ways of valuing costs and outcomes may be used, depending on the perspectives and values of sponsors, stakeholders, targets, and evaluators. Third, the complete use of CBA or CEA may not be feasible, practical, or wise in many evaluation projects.

CBA and CEA may be appropriately performed when the program receives independent funding. They cannot be appropriately performed when the program costs or benefits cannot be separated from those for nonprogram activities. It may be too expensive or time-consuming to collect all the data needed. Some measures of inputs or outcomes cannot be meaningfully converted into monetary terms. Neither form of analysis can be performed when the program impact and its magnitude are not known or cannot be validly estimated.
Examples provided in responses will vary, but should illustrate the differences between CBA and CBE.