Issues in the Practical Application of Cost-Benefit Analysis

John Roman, The Urban Institute

Cost-benefit analysis can offer a rich source of information about the effects of programs and policies. Unless carefully applied, this approach can lead to misleading policy conclusions. This paper will present a few of the questions that should be considered before undertaking such an analysis. Is the key goal of the program to maximize efficiency? Are costs and benefits counted for equivalent groups? Can the demand for the program be articulated? Are there potential principal-agent problems? Are future costs and benefits appopriately discounted? Does the program lead to actual or theoretical benefits? How are program effects isolated? How are costs identified and counted? What proportions of benefits (and costs can and should be monetized?

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Updated 05/20/2006