Teaching Benefit-Cost Analysis
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Teaching Benefit-Cost Analysis

Tools of the Trade

Edited by Scott Farrow

Teaching Benefit-Cost Analysis provides detail and inspiration that extends and clarifies standard textbooks. Each short, self-contained module includes guidance to additional sources while many also provide class exercises. Classes for advanced undergraduates, practitioners, or Masters students could especially apply these tools of the trade.
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Chapter 16: Cost estimation in education: The ingredients method

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.

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