This post is part of our “Four questions” guest blog series. Karen Clay is an economic historian and an associate professor of economics and public policy at Carnegie Mellon University’s Heinz College, where she has been teaching a course on cost-benefit analysis for about five years.
1. Why is it valuable to teach cost-benefit analysis (CBA) to graduate students who are studying policy?
Almost every policy student is going to be a consumer of cost-benefit analysis in their job, either at federal, state, or local government, or at a nonprofit or working as a consultant. Some students will also be involved in the creation of cost-benefit analysis in some capacity. For those reasons, it’s really important that they develop a relatively sophisticated understanding of CBA.
For policy students of almost any type, the analytic exercise of having to systematically quantify costs and benefits is enormously beneficial. Students learn to evaluate estimates from the literature, discuss costs and benefits that are difficult to quantify, apply appropriate discount rates, and evaluate the effects of different estimates of costs and benefits and different discount rates on the final conclusion. This is a very powerful way to analyze problems.
2. Although your background isn’t in criminal justice, you have said that justice-related cost-benefit analyses provide valuable examples for your students. How so?
I like to use justice-related CBAs, because they focus on extremely important policy issues. It is helpful that high-quality cost-benefit analyses of crime and criminal justice interventions are available. For example, we study the Perry Preschool program, which is an early childhood intervention program. It was aimed at low-income African American preschoolers and has had implications for the participants’ later education, work history, and involvement with the criminal justice system. Their involvement with the justice system raises issues about the costs of crime to victims and society, and the costs of prison to criminals and society. We also have examined costs and benefits of substance abuse and of policing, analyses that raise similar issues.
I like my students to see cost-benefit analysis in many different application areas. One of the main reasons is that students will go on to work in diverse areas. Seeing a range of CBAs drives home the point that cost-benefit analysis is a general tool.
3. You recommend that students study both program evaluation and CBA. Would you talk about the relationship between the two?
The two courses are extremely complementary, but have different time frames and focuses. CBA is often done before a policy is implemented, whereas program evaluation typically occurs after the policy has been put in place. They also have different focuses. Program evaluation is about designing policy interventions in ways that facilitate measurement of specific outcomes and then measuring these outcomes. A cost-benefit analysis will monetize these outcomes so that the costs and benefits can be weighed. In the end, there is considerable overlap between the two.
4. What cost-benefit studies do you typically refer to in your class?
We examine Environmental Protection Agency cost-benefit analyses, which are mostly about particulate pollution and the costs and benefits of reducing it. One recent CBA by the EPA focused on the costs and benefits of reducing emissions from cement plants, and another analysis focused on reductions in mercury emissions.
Another popular CBA examines the expansion of buses/rapid transit in Mexico City. The report raises important questions about international context—and the relevance of the monetary values of health effects and of statistical reductions in mortality that were developed in the United States.
We also use an interesting meta-study done by RAND that looks at investing in police. It raises a lot of issues, such as how do you value a rape or a burglary? Or how do you value a murder, and not just the impact of the murder in terms of the loss of life, but the broader social impact of that sort of violence? We can’t always resolve the issues, but it raises interesting questions. Students find those to be engaging examples.
Professor Clay also recommended the following resources for people who want to understand or conduct CBA:
- Guy Hutton and Eve Rehfuess, Guidelines for Conducting Cost-Benefit Analysis of Household Energy and Health Interventions (Geneva: World Health Organization, 2006).
- Stuart Shapiro, The Evolution of Cost-Benefit Analysis in U.S. Regulatory Decisionmaking (Jerusalem: Jerusalem Forum on Regulation & Governance, 2010).
- Charles Wheelan, Introduction to Public Policy (New York: W.W. Norton & Company, 2010), Chapter 12, “Benefit-Cost Analysis.”
- Centers for Disease Control and Prevention cost-benefit analysis guidelines.