Cost-benefit analysis is an umbrella term for various analyzes that compare benefits and costs . Cost-benefit analyzes are used in numerous areas of public services for decision support. In Germany, for example, Federal Budget obliges public corporations to carry out a profitability study before spending ; Cost-benefit analyzes are such a form of profitability study.
Forms of cost-benefit analysis in the broader sense
Cost-benefit analysis in a very broad sense is a class of procedures for evaluating, comparing and making decisions based on their consequences from the point of view of an analyzing planner, who can also be a state authority . This is where they differ from alternative decision-making processes, for example voting, as investigated in social choice theory . Various specific methods can be grouped under the general class of cost-benefit analysis methods:
- Cost-benefit analysis (CBA) (in the narrower sense)
- Costs and benefits are measured in (discounted) monetary units . A project variant is advantageous if the result is positive; the project variant is to be selected that either produces the best overall result or the best profitability of the funds used. This is the classic cost-benefit analysis.
- Cost Minimization Studies (CM)
- Evaluation of the costs of various treatment methods (in the health sector). These are compared with one another (cost-cost analysis). The cheapest method with the same result is chosen.
- Cost of Illness Studies (COI)
- The economic costs of an illness, either within one year ( prevalence approach ) or until the end of life or illness ( incidence approach ) are analyzed. Such studies are partial studies on the cost side as part of a full benefit-cost analysis.
- Cost-effectiveness analyzes / cost-effectiveness studies (CEA)
- Costs are measured in monetary units, but benefits as outcome units (number of years of life saved, working days gained, improved environmental quality, etc.). The result is a quotient. The method with the best ratio is chosen.
- Cost- utility analysis / cost-utility analysis (CUA)
- Can be used when different (intangible) benefit dimensions (time, quality) have to be taken into account.
The cost-benefit analysis in the narrower sense
The cost-benefit analysis is a tool to determine whether the result (the benefit) of an action justifies the effort (the costs). The cost-benefit analysis is the central tool in welfare economics . If the benefits and costs are not certain, their expected values are determined. If effects are to be expected in more than one period of time, the cost and benefit flows are discounted to determine the net present value of the project. If the benefits exceed the costs, the action must be carried out because it brings about a potential Pareto improvement over the initial state. The Kaldor-Hicks criterion usually acts as the decision criterion .
The expected benefits and costs are measured in monetary units in order to make them comparable. Problems arise above all in the evaluation of goods that are not traded on the market (human life, time, many environmental goods, etc.) as well as qualitative benefits that are difficult to quantify (image, customer satisfaction, quality, employee satisfaction, climate protection, etc.).
Use of the cost-benefit analysis in economics
In economics , the cost-benefit analysis is used as an evaluation instrument for government intervention in the market. Since all state interventions are based on welfare theory, they must be justified by a welfare gain. In the common (utilitarian) view, a welfare gain means that the benefit of an intervention by the state outweighs the costs, i.e. could compensate them (potential Pareto improvement). However, this does not actually have to happen. Specifically, the cost-benefit analysis examines government projects and evaluates the costs and benefits in monetary units, which are then subtracted from each other. If this results in a surplus of benefits, the state project meets the requirements of utilitarian welfare theory and should therefore be carried out. Otherwise the project should not be carried out.
Criticism of the cost-benefit analysis in economics
However, the benefit of a project cannot always be expressed in monetary units. Benefits can also be non-monetary, e.g. B. in socio-economic or socio-ecological benefits. A shadow price of the effect is then often used for the analysis , which is applied in different ways. T. be strongly criticized.
Another problem is that the cost-benefit analysis ignores the distribution aspect a priori. It is based on market prices or, if not available, implied market prices (benefit estimates). Aspects of distribution must be explicitly, evaluated, introduced and taken into account. In recent years, the economy has developed a number of methods for better consideration of inequality in cost-benefit analyzes with so-called distributional weights or direct inequality adjustment factors.
Felix Ekardt and Bettina Hennig formulate further points of criticism of economic evaluations such as the cost-benefit analysis. Among other things, they question their compatibility with the legal system and, in general, the epistemology that is implicit in the economic approach. They also point out that forecast uncertainties largely thwart the calculations of costs and benefits in all more complex cases.
Use of the cost-benefit analysis in business administration
In business administration , the cost-benefit analysis is used in particular for estimations , on the basis of which personnel and resource planning as well as offer prices can be calculated. At the same time, the analysis values serve as a control in order to identify deviations from the plan in good time. In the context of projects, the cost-benefit analysis can provide decision-making and argumentation aids. The point here is whether an intended project can or should be realized, with which means or methods and which alternatives should be carried out.
A practical example is the changeover in a company from one operating system to another. On the cost side, there are costs for training employees as well as costs for additional hours to port data. Cost savings for license fees and administrator hours must be offset as benefits.
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