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Henry M. Levin and Clive R. Belfield

Cost-effectiveness analysis is a common tool for ascertaining the efficiency of investment, but it has only rarely been applied to education. This chapter begins by defining cost-effectiveness and addressing the rationale for using cost-effectiveness in education. It proceeds to issues in measuring educational effectiveness using a common metric across interventions. It then devotes considerable attention to how to apply the concept of opportunity cost to cost measurement in education using the ingredients method, which relies on specifying the required resources and their market or shadow prices. It concludes with a sampling of cost-effectiveness studies devoted to different educational topics: teacher selection, dropout prevention, early reading achievement and multiple reforms. The article concludes with future directions.

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Clive Belfield, A. Brooks Bowden and Henry M. Levin

In this chapter, we describe the ingredients method as a simple but formal way to estimate costs for the purposes of benefit-cost analysis. The ingredients method distinguishes between input quantities and prices; the product of quantities and prices yields an estimate of the total social cost of an intervention, program or policy. We begin by clarifying what is meant by “cost” and why budgetary information is unlikely to be adequate for cost analysis. We then describe the ingredients method – how to identify inputs and price out these inputs so that they reflect opportunity cost. Next, we explain why the ingredients method is preferred in terms of transparency, informational content, and ease of sensitivity testing. We conclude with an exercise that illustrates how the ingredients method is applied and why it is preferred to alternative costing methods.