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Using Cost-Benefit Analysis to Assess Government Policies

Instructor: Claude Bourbonniere

Claude has worked as a Company Manager for Cirque du Soleil for the past 20 years and completed an MBA in Global Management at the University of Phoenix in 2014

Governments can use cost-benefit analysis to assess their policies. Learn how the implementation of cost-benefit analysis can be used to effectively assess government policies.

What is Cost-Benefit Analysis

Mr. Smith is a mayor of a small town. He has difficulty assessing the cost-benefit of policies that he put in place, and the policies that he wants to implement. The controller of the town would like him to use the management accounting method of cost-benefit analysis.

Cost-benefit analysis estimates and sums up the equivalent value of the benefits and costs to the community of projects, to establish whether they are profitable for the community. In determining the viability of a project, all aspects of the project, both positive and negative, must be expressed in terms of a common unit, which is usually money.

Examples of Cost-Benefit Analysis

Mr. Smith wants to evaluate the cost-benefit for his town to operate the current library. He first needs to evaluate the costs to operate the library. Then, he needs to evaluate the unit cost by the population of his town, and the unit cost by the number of people who use the service of the library.

Actual

We see from the results of this analysis that the unit cost for the population of the town is $8 per person and $31 per user of the library. The cost per user is close to the cost of a new book ($30). The national average library cost per library user is $20 per user. Mr. Smith realizes with this cost-benefit analysis that the library services of his town are not cost effective!

Mr. Smith can use the same method to evaluate improvements his city can do to the actual library to increase the number of users, and lower the cost per user.

Example of a Cost-Benefit Analysis for a New Project

Mr. Smith can propose to construct a new library in his town. The new library would be able to accommodate more people, and would have more books. People will be more tempted to visit and use the new library.

New

As we see, the usage of the new library would increase by 2,000 users (50%), but the cost for the population will increase to $12 per person, and the cost per user will still be above the national average at $30 per user.

Government policies need to be beneficial for as many people as possible. The money that government invests is the money of the population that elects them. The population needs to see a benefit for the cost invested for them by the government. Mr. Smith needs to change his strategy to be more efficient and equitable for the population who elected him.

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