make a choice. If educational administrators wish to provide suggestions for cutting expenditures, the cost consequences of the alternatives (such as school consolidation) are not adequate in themselves for making an informed decision. And if taxpayers want to maximize revenue and minimize spending, they should consider educational investments that do this (such as investments in college subsidies). In short, information on costs, effects, and benefits is necessary to adequately inform the decision.
1.3. Economic Evaluation for Decisionmaking in Education
One of the more confusing aspects of incorporating cost analysis into evaluation and decisionmaking is that a number of different, but related, terms are often used interchangeably. These include cost (along with cost-feasibility), cost-effectiveness (along with cost-utility) analysis, and benefit-cost analysis. Although each is related to and can be considered to be a member in good standing of the cost-analysis family, each has important differences that make it appropriate to specific applications (Levin, 1975). Here we provide an overview of each approach and the main differences among them; a full explanation is given in the relevant chapters. We demonstrate the key ideas and practice with concrete examples from the educational literature. These examples are not intended to inform readers of which interventions are actually most efficient; rather, they are illustrative of what is involved in an economic evaluation.
1.3.1. Cost Analysis
All the types of analyses discussed in this volume involve calculation of costs. This calculation is an essential part of economics—that implementing any program or intervention requires resources that have value. The ingredients method, as described in detail next, requires a descriptive itemization of all resources. Thus, the first type of analysis is simply to calculate the costs of these resources by applying the ingredients method. In itself, these calculations are useful: They can reveal a great deal of information about each educational intervention. Such information includes the extent of dosages, who delivers them, what types of professional staff are needed, and what resources are used instead of the intervention. Perhaps surprisingly, many education reforms proceed with only a terse description of the resources being applied.
Moreover, estimates of costs alone are important for another reason: They are a guide to affordability. CF analysis refers to the method of estimating only the costs of an alternative in order to ascertain whether or not it can even be afforded. If the cost of any alternative exceeds resources that are available, there is no point in doing any further analysis. As a concrete illustration, one might view the situation of compensatory education, in which a specified amount is available for augmenting the education of each disadvantaged child. If this amount is $400 per child, then any alternative that violates this constraint would not be feasible. Nevertheless, even this limited scope is helpful for policymaking. CF represents a limited form of analysis that determines whether or not alternatives are within the boundaries of consideration. It cannot be used to determine which affordable options should actually be selected. As another example, we can imagine a community that believes it is equitable to spend the same amount on each grade; early interventions in first grade, even if they are found to be highly effective, might be rejected on equity grounds because they involve giving disproportionate resources to a single grade. See Example 1.1 for CF analysis of class size reduction.
Example 1.1 Cost-Feasibility Analysis of National Class Size Reduction
Class size reduction has been a popular policy for improving educational outcomes, and the evidence that it increases achievement in the early elementary school grades is compelling (Krueger, 1999). A school district—faced with accountability pressures to improve performance—might consider reducing class size. But even before considering whether class size reduction will boost test scores, a much simpler and more basic question is whether such a sweeping plan could be feasibly implemented in light of current and future budget constraints. Would the costs associated with a national class size reduction be prohibitive?
Dominic Brewer and his colleagues (1999) estimated the expected costs of different approaches to national class size reduction in Grades 1 through 3. To yield a baseline cost, this estimation required a number of assumptions about the scope and design of the policy. Their baseline assumptions were as follows. First, there are three possible targets for class size reduction: 20, 18, and 15. Second, class size reduction is implemented districtwide (such that class size reduction is an average per district, with flexibility per classroom and per school). Third, the policy applies uniformly to all students such that there is no targeting of the policy toward specific groups such as high-poverty schools or districts. Finally, and most importantly, only operational costs are considered, such as salaries and benefits of teachers, aides, and administrators, as well as instructional materials and supplies. No consideration is given to the costs of facilities and infrastructure and no cost is given to the process of transitioning from larger to smaller classes. If these costs were included, the overall cost of class size reduction—the actual cost—would be considerably higher. Upon arriving at their baseline estimates, they varied several key assumptions in order to observe the sensitivity of cost estimates. Their baseline estimates are given in the following table.
Source: Brewer et al. (1999, Table 2).
Note: Adjusted to 2015 dollars.
In 2015 dollars, the cost of operating the education system with class sizes of 20 in Grades 1 through 3 would be an additional $3.19 billion each year (or $280 extra per pupil). Lowering class size to 15 would result in substantially higher total and per-pupil operational costs of $16.57 billion and $1,470, respectively. Leaving aside transition costs and the resources required for facilities, these cost amounts raise questions as to whether reducing class size meaningfully is affordable.
With sensitivity analysis, the authors can tell us what makes the biggest difference to costs. For example, class size reduction is less costly if the targeted levels of class size must only be met on average across the entire state, rather than across districts. On the other hand, it is more costly if average class sizes in each school must meet targeted levels. Moreover, the policy is much less costly if it is targeted only at schools with large numbers of high-poverty students.
Cost-feasibility (CF) estimates cannot inform decisionmakers as to whether class size reduction is a socially desirable investment in absolute terms or whether it is relatively more desirable than another investment. This can only be accomplished by weighing the costs of class size reduction against its benefits or effectiveness. Nevertheless, the cost estimates can tell decisionmakers whether national class size reduction is feasible within the current set of budget constraints. This information is especially useful in situations where the resource requirements are not easily observable (e.g., when the school might not know how many new teachers to hire or how much it will cost to reorganize the school schedule).
Source: Adapted from Brewer et al. (1999).
1.3.2. Cost-Effectiveness Analysis
CE analysis is an evaluative technique that compares policies or programs based on their ratios of costs to educational results on a quantifiable (but not monetized) effectiveness measure (Boardman, Greenberg, Vining, & Weimer, 2011, Chapter 18; Levin, 1975). This analysis allows us to take account of both the costs and effects of selecting alternatives, making it possible to choose those alternatives that provide the best results for any given resource outlay or that minimize the resource utilization for any given outcome. For example, we can compare alternative interventions for improving academic performance in mathematics or reading to consider the interventions that show the largest achievement gain relative to their costs.
Standard approaches to evaluation are more limited because they primarily focus
