PLS 304 – Introduction to Public Policy Analysis Mark T. Imperial, Ph.D. Topics: Evaluative Criteria  Some Basic Terms and Concepts − Criteria are what we use to guide decision making and compare alternatives − Goals: formally and broadly worded statements about what we desire − Objectives: more focused and concretely worded statements about end states, usually with a time dimension and a client population specified − Criteria: specific statements about dimensions of the objectives that will be used to evaluate alternative policies and programs − Measures: tangible, if not quantifiable operational definitions of the evaluative criteria. Each criterion should have multiple measures associated with it. − Establishing Evaluative Criteria − Define and establish acceptable and useful criteria. The role of the analyst includes helping the decisionmaker clarify what is sought and define objectives so that alternatives can be designed − In practice, decisionmakers may not want to establish clear criteria so they establish purposely-vague criteria. − Analysts may also be frustrated when politicians are unwilling to discard multiple, conflicting objectives − Defining criteria is a learn by doing exercise. By interacting with clients, and working through the analysis, new criteria are discovered as old criteria are examined  Common Evaluative Criteria − Strong arguments can be made for always including efficiency as a substantive value in policy analysis. − However, there are values other than Pareto efficiency − Effectiveness − Effectiveness refers to the likelihood that a policy or program will achieve stated goals and objectives or demonstrated that it achieved them − Problem is that many policies and programs have multiple, competing goals and objectives and some may be achieved at the expense of others − Costs & benefits as a measure of efficiency − Evaluating costs and benefits is central to policy analysis − Benefit-cost analysis is the systematic analysis of the value of the benefits and costs of an alternative. It is a way to compare the efficiency of alternative courses of action that may have different goals and objectives. The ratio of benefits to costs is a measure of efficiency. In general, you would not proceed unless the ratio of benefits to costs is greater than 1. − Cost-effectiveness analysis is tool for finding the alternative that accomplishes the specified goal at the lowest cost. - 1 -PLS 304 – Lecture Notes Evaluative Criteria − Opportunity cost: the resources diverted from other uses to make a given policy or program possible. In other words, the difference between the value of goods and services in a proposed project and their value if they were used in some alternative way. They include monetarizable and nonmonetarizable and tangible and intangible costs − Intangible costs or benefits: those that cannot be measured in recognized units (pain and suffering, loss of confidence) − Tangible costs and benefits: those that can be measured in some type of recognizable unit – they can be counted − Monetarizable costs and benefits: they can be counted in monetary – dollar – terms since their value can be judged in the marketplace − Direct costs: resources that must be committed to implement a policy or program. This includes borrowing costs, one time fixed costs, borrowing costs, and operating and maintenance costs − Indirect costs: the costs associated with impacts or consequences of a policy or program. − For example, building a new parking garage has costs in materials and operation and maintenance (direct cost). After its construction it might also increase traffic in surrounding neighborhoods (indirect cost) − In practice, it is not always easy to distinguish between direct and indirect costs. A key is what was the legislative intent of the policy or program − Sunk costs: they are costs associated with resources already built or paid for (If you propose expanding a bridge, you don’t include the cost of the bridge already built) − Shadow prices: a method of establishing costs/benefits when market prices are unavailable or distorted. You can establish the price by looking at another context that is viewed as competitive. − Discount rates: a rate estimated to calculate the time preference for money so that analysts can determine future values in today’s dollars. Key feature is that a dollar today is worth more than getting a dollar tomorrow − Standing refers to who is to be considered when costs and benefits are computed. In other words, who has a right to be included in the set of individuals or groups whose changes in utility or welfare are counted. − Determining boundaries of a cost-benefit analysis often influences the results − It is really a contextual decision and when there is doubt, you should do the analysis in a variety of ways with different definitions on standing − Marginal analysis − Fixed costs: do not vary with the scale of the public action, at least in the short run (capital costs like purchasing a new garbage truck) − Variable costs: vary with the level of output (to collect more solid waste requires more labor and possibly new trucks and other equipment) − Average costs: simply the total costs divided by the total output ($350 per ton of garbage collected) − Marginal cost: is the cost incurred to produce an additional unit of output (cost of collecting 1,100 tons of garbage compared to 1,099 - 2 -PLS 304 – Lecture Notes Evaluative Criteria − Marginal costs usually decline with additional output, but not always (e.g., at some point you will need to buy a new truck) − Rule of marginality states that output should be produced to the point where marginal cost equals marginal revenue − Law of diminishing or increasing returns: Eventually you will reach a point where each new unit of cost contributes less benefit than the preceding unit (diminishing) or each new unit of cost contributes more benefit than the preceding unit (increasing). − These occur in the short run where levels of some inputs are fixed − Economies and diseconomies of scale: Larger size causes decreased marginal costs (economies of scale) and larger size causes increasing marginal costs − Occur in the long run where levels of all variables can be increased or decreased − Pitfalls when dealing with