It is not sufficient to measure the impact of a public policy to know whether it is efficient or not. Indeed, a policy can only be considered efficient if all the benefits outweigh all the costs. Cost-benefit analysis ascribes a monetary value to both components, so as to calculate the total net value of the policy being examined.
Ex-post et ex-ante analysis
This type of analysis is often used as an ex-ante decision tool (that is, before the implementation of a reform) but may also serve as an analysis framework for ex-post evaluation, once the reform has been implemented.
The net present value of the benefits of a public policy is more complex to calculate than the net present value of a private investment. Whereas investment decisions can be made while considering the market cost of production factors and the predictable profitability of an investment, an assessment of the costs and of the benefits of a public policy rarely relies on market prices. In some cases, such prices exist, but they do not reflect the costs and the social benefits because they do not take into account possible outsourcing opportunities, they are contaminated by asymmetric information and they are regulated by the state.
In other cases, these prices simply do not exist: the social costs of pollution-induced environmental damage, for example, are difficult to assess in the absence of a market that measures the value of a preserved environment. Thus, the main challenge of cost-benefit analysis is to estimate these costs and benefits for society when both components are not directly measurable.
Despite these limits, a monetary valuation of the benefits of a public policy cannot be avoided when comparing the respective merits of alternative interventions.
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