Institutional Learning and Change Initiative

The following text is drawn from ISNAR (2003).

Cost-effectiveness analysis is a particular type of benefit - cost analysis in which the objective is to compare costs of two different means of generating the same information or end product.  Basically, it is a simple approach that compares the technical efficiency and cost of alternative methods to accomplish a given task, exogenously defined as required.  This approach is most useful when one is evaluating two systems, which yield comparatively similar outputs.  The basic steps in cost-effectiveness analysis are:

• Define the objectives that must be attained;
•  Identify the alternative methods of achieving the objectives or obtaining the output;
•  Determine the costs of these various alternatives; and
• Compare the costs and rank them.

Advantages of Cost-Effectiveness Analysis
The primary advantage of the cost-effectiveness method is that one does not need any benefit information.

Shortcomings of Cost-Effectiveness Analysis

The major shortcomings of the cost-effectiveness approach are:

• There is nothing to prove that any of the alternatives compared can yield benefits over and above costs.  This is why cost-effectiveness analysis is only justifiable in situations where one system is certain to be undertaken in the absence of the other; and
• The products/outcomes of the alternatives must be virtually identical in terms of output if the magnitude of the cost saving is to be representative of the net social benefit.  If one of the alternatives costs less, but produces a lower quality product and/or have different impact, then the computation of benefits becomes much more complicated.  Lower cost will create a positive social benefit, but the lower quality will yield a dis-benefit, that is, the willingness to pay will decline.
   

Source: ISNAR (2003) Monitoring, Evaluation, and Impact Assessment of R&D Investments in Agriculture, The Hague: International Service for National Agricultural Research.