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Cost-benefit analysis

Cost-benefit analysis is a framework for selecting interventions, commonly used in economics and finance.

Cost-benefit analysis estimates the ratio between the cost and the benefit of the intervention. Interventions with a lower ratio are said to provide a higher return. Cost-benefit analysis can be used in finance or business to refer only to private returns to an intervention, but in the context of effective altruism, it is more relevant to consider social costs and social benefits.

In cost-benefit analysis, both cost and benefit are measured in monetary terms (in contrast to cost-effectiveness analysis, where benefits are expressed in terms of some non-monetary outcome). Costs are generally already monetary. However, the outcomes of a program may be primarily non-monetary (for instance, the program might mostly have impact by improving health). In such cases, a monetary value will be assigned to the non-monetary unit (for instance, a value will be assigned to a year of additional healthy life). Then all non-monetary benefits will be converted into a monetary form, for comparison with costs. The valuation of non-monetary benefits is often a difficult and contentious aspect of cost-benefit analysis.

Cost-benefit analysis can be carried out on an average level (looking at the total cost and total impact of an intervention), or at the marginal level (examining the impact of an additional dollar).

Further reading

Wikipedia. 2016. Cost–benefit analysis.
A discussion of other applications of the concept.