Cost Effectiveness Analysis

Another technique commonly used to improve public-sector performance is cost-effectiveness analysis. The purpose of cost-effectiveness analysis is to determine how to best employ resources in a given social program or public-sector investment project. One common approach is to hold output or service levels constant and then evaluate cost differences resulting from alternative program strategies. For example, a local school board might be interested in evaluating alternative special education programs and their respective costs. The cost-effectiveness analysis approach might compare mainstreaming, separate classrooms, or itinerant teaching in terms of their effectiveness in meeting important special education goals. The most cost-effective method is the decision alternative that meets specific educational goals at minimum cost.

Cost-effectiveness analysis is useful for evaluating the effectiveness of social programs and public-sector investment projects where output can be identified and measured in qualitative terms but is difficult to express in monetary terms. For example, cost-effectiveness analysis can be used to evaluate the success of alternative transportation programs such as taxis or social service vehicles for the handicapped but cannot be used to determine if providing transportation for the handicapped is worthwhile from a resource allocation standpoint. Cost-effectiveness studies are also useful in situations where significant externalities or other intangibles exist that cannot be easily measured in dollar terms. In such cases, negative impacts of social programs can be dealt with by excluding from consideration all decision alternatives that generate negative impacts beyond a certain level. The selection of a preferred alternative is made on the basis of differences in tangible performance measures.


Transfer of public-sector resources to the private sector

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