Cost Benefit and Multi-Criteria Analysis
Page updated 21 Sep 2015
Cost Benefit Analysis (CBA) and Multi-Criteria Analysis (MCA) are analytical tools that can be used to evaluate the costs, benefits and risks of options presented in a Regulatory Impact Statement (RIS). They are not mutually exclusive, and in fact analysis is best when the two are used in conjunction with each other.
Cost Benefit Analysis
CBA is an important tool used to evaluate different policy options to improve government decision-making. CBA evaluates different options against a single welfare criterion: ‘net benefit’ (often called ‘efficiency’).
A CBA that assesses a Government policy must identify all the economic impacts (costs and benefits), including social and environmental. The result of a CBA is a calculation of the net impact of a proposal to New Zealand as a whole. It is important to remember that while a CBA may show a significant net benefit of a policy it does not identify the beneficiaries and the distribution of the benefit.
The goal of a CBA in a RIS is to provide information to decisions makers by using an objective framework to assess the impacts of different options. A full quantitative CBA may not be possible or necessary given the size of the issue, however; the logic of a CBA should always be applied and a indication given to decision-makers on whether or not the expected net benefit of an option is positive or negative.
MCA, like CBA, is an important tool used to evaluate different policy options to improve government decision-making. MCA evaluates different options against a set of criteria. ‘Effectiveness’ is a criterion that is often used to assess whether an option meets the stated objectives.
Applying MCA involves identifying the underlying policy objectives and then determining all of the factors (the criteria) that would indicate achievement of the objectives. The criteria can be ranked (or weighted) in terms of their relevant importance – or left to decision makers to determine what they think the ranking should be. Policy options are then identified and scored against the individual criterion, this scoring is often summarised in a table.
The goal of a MCA in a RIS is to provide information to decision-makers by assessing options against criteria that if met would indicate achievement of the stated objectives. MCA is not a substitute for a CBA; MCA complements CBA.
Cost Benefit and Multi-Criteria Analysis Guidance
The RIA handbook contains expectations and guidance on how and when departments should use CBA and MCA: Regulatory Impact Analysis Handbook.
Treasury has published a Guide to Social Cost Benefit Analysis which provides simple, accessible and practical assistance intended for public sector policy and financial analysts: Guide to Social Cost Benefit Analysis.