Benefit-Cost Analysis

Benefit-cost analysis (BCA) is an economic tool that is designed to evaluate alternative public investments to determine if their benefits exceed their costs and by what magnitude. As a policy tool devoted to resource allocation, BCA is used to rank alternative uses of public resources to choose the decision options that provide the largest social benefits relative to the social costs that they incur. The cardinal rule is that no alternative should be funded unless its expected benefits exceed its costs. However, the stricter criterion is that one should select among alternatives those with the largest benefits [Page 78]relative to costs (highest benefit-cost ratio or net difference between benefits and costs) to get the greatest social gains. In education, one can view this as choosing educational projects or interventions that have the largest benefits relative to their costs. This entry first explains how benefit-cost analysis works and how it differs from cost-effectiveness analysis. It then looks at how BCA could be used in evaluating educational technology and discusses why cost-effectiveness analysis might be a more useful tool.

BCA has a long history, with its initial use in evaluating American water resource projects that had been proposed to Congress where the volume of requested projects vastly exceeded the financial appropriations available. These projects required massive social investments in hydroelectric dams, widening and deepening of harbors and rivers, and flood control. Benefits varied from potential reductions in flood damage to increased output of electricity and potable water and recreational opportunities to cheaper and faster transport of goods. But the diversity of the benefits of different projects made them difficult to compare unless their costs and benefits were measured in comparable terms, in this case their dollar values. By comparing the dollar value of the expected benefits among projects with their expected costs, it was possible to determine if benefits of a project exceeded costs and how the net benefits ranked among projects. The logic and methods of applying BCA to water projects spread slowly to the evaluations of other social investments, such as transportation, criminal justice, national defense, and health.

BCA is sometimes confused with cost-effectiveness analysis (CEA), a related evaluation tool. BCA compares the monetary value of both expected costs and results of each competing alternative. It is not always possible to ascertain the monetary value of results of social interventions. For example, in education, student achievement gains or course completions cannot be converted easily to dollar benefits. In those cases, projects are ranked according to their cost-effectiveness or the educational results that they deliver relative to their costs, such as the cost per unit of test gain. Those alternatives with the highest effectiveness relative to costs are favored. BCA and CEA share the same techniques for cost measurement, so only the measurement of outcome or results differs.

Because BCA requires monetary values for both costs and outcomes, it is used primarily where the results of interventions can be measured by performance in the competitive marketplace. For example, persons who obtain more education have been shown to have higher productivity and earnings in the workplace as well as better lifetime health. Both of these outcomes can be assessed in monetary values and compared with the costs of additional education required to yield the benefits. A society can examine whether additional educational investments have benefits that exceed costs and by how much, as well as comparing the benefits and costs of different approaches to increasing educational outcomes. BCA studies have looked at investments in early childhood on adult outcomes as well as returns to high school completion and other levels of education.

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