Economic evaluation identifies and places a value on a program’s economic costs and benefits.
Economic evaluation is a particularly helpful when we want to:
- assess whether a program is worth the effort and whether the outcomes justify the investment
- compare alternatives on a consistent basis, when there are different ways of achieving the same outcome
- identify aspects of a program that can be made more efficient, from a financial perspective.
Inputs and outcomes
Economic evaluation relies on sound information about inputs and outcomes. Economic evaluation can only be undertaken when a program’s costs can be identified and there is reliable data about its outcomes. If an economic evaluation is likely to be required, data collection for this purpose should ideally be planned before the program is implemented.
If it isn’t possible to determine the outcomes of a program, its value in an economic sense cannot be assessed and economic evaluation is not possible. Similarly, ineffective programs cannot provide value for money.
Looking backwards or forwards
Economic evaluation can be either forward-looking or retrospective. The term economic evaluation usually refers to a retrospective exercise, where we are looking back on the outcomes that have been produced to-date. In the NSW Government, economic analysis based on the forecast outcomes is typically referred to as economic appraisal. Where such an appraisal has been undertaken as part of the business case process, an economic evaluation provides an opportunity to validate the predictions made in the appraisal.
Forms of economic evaluation
- Cost benefit analysis - involves the consistent valuation of costs and benefits in monetary terms for both monetary and non-monetary variables (economic, social and environmental) across time. It is most usefully applied when the major benefits of a program can be reasonably quantified and monetised. Cost benefit analysis often involves calculation of a benefit cost ratio. A benefit cost ratio of 1.5 means that, for every $1 invested in the program, $1.50 worth of benefit is produced.
- Cost effectiveness analysis - is used when the benefits of a program cannot be easily quantified in monetary terms. Cost effectiveness analysis is used to compare different programs that take different approaches to achieving the same objectives. Leaving the outcomes in their own unit of measurement, Cost effectiveness analysis allows the identification of the lowest cost means of achieving the intended outcomes, for example, the most cost effective way of reducing absenteeism, or the most cost effective way of providing newly appointed teachers with mentoring support.
Even if we don’t have the necessary data to do a full economic evaluation, there are still concepts from economics that are useful in evaluative thinking.
One example is the idea of an opportunity cost. If we spend $4,000 of equity loading on a certain project, those funds are no longer available for other things. The opportunity cost of the project is the value of the alternative activities that could have been implemented using those resources if we had taken a different path.