Cost-Benefit Analysis Toolkit
The Cost-Benefit Analysis and Justice Policy Toolkit (Vera Institute of Justice, December 2014), is designed to guide justice analysts new to CBA through its foundational steps. The full report, which is summarized below, provides real-world examples throughout each of the six steps of cost-benefit analysis.
Before you get started with a CBA, consider whether another type of Economic Analysis—cost analysis, fiscal impact analysis, or cost-effectiveness analysis—might better suit your research question. Although CBA is the most comprehensive form of economic analysis, other assessments may be sufficient.
- Identify the investment’s potential impacts.
A cost-benefit analysis cannot be performed without measuring the investment’s effects. So the first step is to determine all of the investment’s potential impacts. This step will identify the impacts you should aim to quantify and monetize. To get started, ask the following two questions: (1) Which parties might benefit from the investment and which might bear costs? (2) What are the potential benefits and costs for each of these perspectives?
Consider a long-term time horizon when thinking about an investment’s potential impact. In some cases, the investment’s impact may be immediate but may not result in future impacts. In others cases, short-run impacts will lead to others in the long term.
- Quantify the investment’s impacts
The second step of a CBA is to determine which of the potential impacts you identified can be measured through an outcome evaluation, and then to measure those impacts through an evaluation of the program being considered or by evaluations of similar programs. CBA is sometimes referred to as a “second-generation” evaluation tool because it relies on an outcome evaluation to establish the causal link between an investment and its impacts. When an investment cannot be evaluated, meta-analysis is often used to estimate the program’s impacts. For more on outcome evaluation and meta-analysis see Advancing the Quality of Cost-Benefit Analysis for Justice Programs.
- Determine marginal costs
What is the dollar value of the initiative’s impact on justice agencies? Who does the program benefit? Criminal justice initiatives can affect many groups, including taxpayers, victims, and program participants. To monetize the impacts quantified in the outcome evaluation, multiply them by the applicable marginal cost. The marginal taxpayer cost is the amount of change in an agency’s total operating costs when output (such as arrests or jail days) changes as a result of the program or policy investment. The marginal victim cost is the monetized value of each incident of crime.
Justice CBAs should measure the impact on all affected agencies, even those that are not implementing the policy or program. If the initiative reduces crime, it decreases victimization and its associated costs. Keep in mind that justice investments often result in impacts beyond those to taxpayers and victims, such as improved health, education, or employment outcomes for program participants, which also must be monetized in a comprehensive cost-benefit analysis.
- Calculate costs, benefits, and net present value
Once you have measured the investment’s impacts and collected the marginal costs associated with each one, you can compute the CBA results. This will answer whether the benefits outweigh the costs in the long run. Begin the cost-benefit calculation by measuring the costs of the investment. These are typically taxpayer costs, but some investments are supported by other resources, such as user fees or volunteer time.
Once you calculate the cost of the initial investment, the next step is to tally the costs and the benefits that accrue as a result of the investment. These effects are quantified by the outcome evaluation and then monetized by multiplying these impacts by the appropriate marginal cost. When your CBA examines effects beyond one year, you will need to discount the values of future costs and benefits.
- Test the assumptions
Cost-benefit studies often incorporate assumptions when sufficient data is not available. Such assumptions introduce uncertainty into the analysis that you should test by using a technique called sensitivity analysis. Sensitivity analysis shows how responsive—or sensitive—a study’s results are to changes in assumptions. It is important to use sensitivity analysis because there is typically some uncertainty about CBA model inputs.
- Report the results
Once you have computed the CBA results and tested them, the final step is to compose a report that communicates your findings. As a general rule, all tables should be clear and comprehensive so that people can understand them without reading the accompanying narrative.
A number of summary metrics are used to report cost-benefit results. The metrics net present value (NPV) and benefit-cost ratio (BCR) are commonly used, although the consensus among CBA experts is that the NPV most accurately depicts the results.
Because analytic decisions can heavily influence a CBA’s results, it is important to include thorough descriptions of your methods, data, and any limitations. To paraphrase the Golden Rule, you should provide as much documentation for others as you would want them to provide to you. Provide detail on all the program impacts, marginal costs, assumptions, limitations, and data sources in your study. The most thorough studies report the perspectives, costs, and benefits that could not be monetized; and a range of likely results when a single result cannot be presented with confidence.