Beginning a Cost-Benefit Analysis: Where Do I Start?

As the newest member of the team at Scioto Analysis, I have the opportunity this month to begin work on my first cost-benefit analysis. Cost-benefit analysis is one of the main tools analysts use to help policy makers understand the tradeoffs between policy options. 

The first step in a cost-benefit analysis, or any policy analysis for that matter, is to define the problem. Our research is only ever as good as the questions we ask. For this project, I am analyzing policies for cleaning up Ohio’s rivers, a topic close to home for us here at Scioto. 

I spent the first week of this project assembling evidence. I found that assembling evidence for a cost-benefit analysis is slightly different than for most other research projects, mainly because the scope of a cost-benefit analysis is often larger than research I have done in the past. I am most familiar with projects where the intervention and outcomes are prespecified. Policy choices almost always have far reaching side effects and the better we understand these the more accurately we can represent the trade-offs. 

I began having a general understanding of the evidence I was looking for, but it took a lot of reading to fully understand the scope of the question of how to improve water quality in Ohio. Seeking out reports from experts in this field brought my attention to a number of different side effects I would never have considered by myself. Even a brief conversation with a friend who studies marine biology helped me find new angles to explore!

After exploring how clean water can affect people’s lives, I finally had to make sure there were ways to monetize impacts. This is a cost-benefit analysis after all, and in order to compare the costs of policy changes (which are often but not always strictly financial) to the benefits, we need a standard unit of account, in this case dollars. 

The quality of the evidence collected directly affects the quality of the final report. As the saying goes, “garbage in, garbage out.“ It is important to find evidence that is as recent and up-to-date as possible, as well as research from comparable geographic and cultural contexts. A study estimating the willingness to pay for clean water in a developing country would not be very helpful in determining the willingness to pay for clean water in a place where safe drinking water is taken for granted. 

All of this research can take time and be frustrating. Information can be out of date, hidden behind paywalls, and sometimes just nonexistent. That being said, collecting good evidence is arguably the most important step in cost-benefit analysis and deserves care and attention from the analyst. A solid base of knowledge makes every part of the process go more smoothly and prevents us from being in a situation where we have garbage going in, and garbage coming out.

This blog post is part of a series of posts on conducting cost-benefit analysis for newcomers by Scioto Analysis Policy Analyst Michael Hartnett.