Policy Analysis

Stages of Public Policy Process

Problem
Identification

Policy Evaluation Agenda Setting

Policy
implementation Policy
Formulation

Decision Making
 Policy Analysis
• Is defined as Systematic comparison and evaluation of alternatives available to
public actors for solving social problem

• It is systematic investigation of alternative policy options and the assembly and

integration of the evidence for and against each option

• Policy Analysis is not about intended to determine policy decisions rather to

inform the stakeholders about the reality of the decisions

• Policy process involves both descriptive or empirical study, which tries to

determine the facts of a given situation and a normative or value based
assessment of the options

• Policy Analysis is not a formula for solving public problems, but it can bring
valuable information to both policy makers and public
 Policy Analysis
• It is the cost benefit analysis of the policy alternatives, which
attempts to estimate dollar values for all benefits and costs
of policy solutions, which have no explicit market value

• For example, the benefits of a new section of highway

include time saving for travelers as well as possible reduction
in energy use and air pollution due to less congestion

• Cost include construction spending, the loss of the benefits

of alternative projects, added noise, increased danger from
higher speeds and increase in road kill
 Policy Analysis
• Policy Analysis Process is generally comprised
of following steps

1. Define and Analyze Problem

2. Construct the Alternatives
3. Develop and Select Evaluation Criteria
4. Assess the alternatives
5. Draw the Conclusions
 Policy Analysis
• STEP ONE [Define and Analyze Problem]

• Problem definition gives you a reason for doing all the necessary work
to complete the project and sense of direction for evidence gathering
activity. Usually complaints, threats, worries and troubles provide basis
for problem definition

– Define the problem

– Measure the problem
– Determine the extent or magnitude of the problem
– Determine the possible causes of the problem
– Determine the goals or objectives of the policy solution
– Determine” what can be done”
STEP TWO [Construct the Alternatives]
STEP TWO [Construct the Alternatives]
STEP THREE [Develop and Select the Selection Criteria]
STEP THREE [Develop and Select the Selection Criteria]
STEP THREE [Develop and Select the Selection Criteria]
 STEP FOUR [Assess the Alternatives]
• Economic Approach
– Cost & Benefit Analysis
– Cost Effective Analysis
– Risk Assessment
• Political & Institutional Approach
– Political / institutional feasibility
• Ethical Analysis
 Economic Approach

• Cost – Benefit Analysis

– It seeks to determine if the aggregate of the gains that

accrue to those made better off is greater than the
aggregate of losses to those made worse off by the policy
choice
– The gains and losses are both measured in dollars, and are
defined as the sum of each individual’s willingness to pay
to receive the gains or to prevent the policy-imposed losses
– If the gains exceed the losses, the policy should be
accepted according to the logic of CBA
 Economic Approach

• Cost Benefit Analysis

– Identify all important costs and benefits

– Measure those costs and benefits that can be
expressed in dollar terms
– Adjust the measurement for changes in value over
time
– Sum up and compare all the benefits and costs and
conclude whether the costs out weigh the benefits
or vice versa
 Economic Approach

• Cost Benefit Analysis (CBA)

– It is the implicit or explicit assessment of the benefits and costs (i.e., pros and
cons, advantages and disadvantages) associated with a particular choice.
– Benefits and costs may be monetary (pecuniary) or non-monetary (non-pecuniary,
“psychic”).

• Public Policy Objective: Choose the level of output of a good or service to

maximize net social benefits (NSB)

NSB = TSB – TSC

where
TSB = total social benefits
TSC = total social costs
 Economic Approach

• Cost Benefit Analysis

Marginal Social Benefit (MSB) = additional social benefits from one more unit
of output

Marginal Social Cost (MSC) = additional social costs of producing one more
unit of output

MSB = d TSB/d Q
MSC = d TSC/d Q
Q = quantity of a publicly provided good or service

NSB are max when MSB = MSC

Social Decision Rule: Choose Q for which MSB = MSC
 Economic Approach

• Cost Benefit Analysis

– Present Value

• Costs and benefits may occur over different periods of time, e.g.,
costs for a dam built today may be spent primarily during the initial
period of the project, but benefits will accrue over the lifetime of the
dam.

• To account for all costs and benefits in the same units across
time periods, we calculate the present value of net benefits:
• PV(NB) = NB/(1+r)t
 Economic Approach

• Cost Benefit Analysis

– Present Value

• $100 invested today at an annual interest rate (r) of 4% will be worth $104 in 1
year.

• Present value (PV) of $104 next year when r=.04 is $100.

• That is, $104 tomorrow is worth $100 today.

• PV = F/(1 + r),
• where F is a fixed sum of money to be received next year.
 Economic Approach

• Cost Benefit Analysis

– Value of Life

• Many public programs and projects involve the prevention of loss of life:
dams, maintaining roads, traffic signs, provision of health care, employment
of firefighters, etc.
• How do economists value a life saved (death averted) in the cost-benefit
calculus?

– Human Capital Approach

– Willingness to Pay Approach
 Economic Approach

• Human Capital Approach

– Method often used in court cases, e.g., court awards the family of a man
who dies at 35 in a car accident the amount of his expected PV of lifetime
earnings = $650,000 (USA)
– Value of life = Present value of lifetime earnings

• Problems with human capital approach:

– People who are not working for pay (homeworkers, students, retirees) are
valued at 0
– Implies that people with higher wages have higher social value
– Does not account for market imperfections e.g. discrimination
 Economic Approach

• Willingness to Pay Approach

– Value of life is estimated from the amounts that people are

WTP to reduce the probability of dying.
– Suppose the cost of a safety device (e.g., smoke detectors,
seat belts, radon gas detectors) which reduces the probability
of death by 1 in 10,000 is $100, and people are WTP the $100.

• Value of life = MC/(change in probability of dying)

= 100 / (1/10,000)
= Value of life = $1 million
 Economic Approach
• Cost Effectiveness Analysis (CEA)

– CEA is an alternative to CBA. This technique compares the relative costs to the
outcomes (effects) of two or more course of action

– This is most useful when analysts face constrains which prevent them from
conducting CBA
– The most common constrain is the inability of analyst to monetize the benefits

– This is often used in health services, environment or road safety policies

where it is inappropriate to monetize the health effect or safety of life

– CEA measures costs in common monetary value and the effectiveness of an

option in terms of physical units
 Economic Approach
• Cost Effectiveness Analysis
– Cost and effectiveness results are incommensurable,
they can’t be judged on the same scale. One can only
compute the ratio of costs to effectiveness

• CE Ratio = C1 / E1
• EC Ratio = E1 / C1
– C1 is cost of option 1, E1 is the effectiveness of Option 1
• CE measures the $ spent on each life saved, most cost-
effective ratio would have lowest CE ratio
• EC ratio measures lives saved per $ spent, most effectives
project should have highest ratio
 Economic Approach
• Cost Effectiveness Analysis

– CEA is most useful before a program has begun, as

it enables the comparison of two course of action.
This can be used at program design as well as
evaluation stage
– CEA takes a broader view of costs and benefits,
including indirect and long term effects, reflecting
the interests of all stakeholders who will be
affected by program
 Economic Approach
• Risk Assessment

– Risk is usually defined as the magnitude of adverse consequences

of an event or exposure, the event may be an earthquake, flood,
car accident, nuclear power plant accident or terrorist attach etc.

– It is the close relative of CBA. Its purpose is to identify / estimate

and evaluate the magnitude of the risk to citizens from exposure
to various situations

– Purpose of risk assessment of policy alternatives is to reduce the

risk, which conveys the benefit to the public
 Economic Approach
• Risk Assessment

– Risk Assessment is the use of different methods to identify

risks and estimate their probability and severity of harm

– Risk evaluation is the determination of the acceptability of

the risks or a decision about what level of safety is desired

– Risk Management describes what Govt. or other

Organizations do to deal with risks, such as adopting public
policies to regulate and prevent the risk
 Political Analysis
• Political Feasibility

– It is a criterion for evaluating suggested policy changes, is the extent to which

elected officials and other policy actors support change / policy initiatives
– No formula is available for estimating political feasibility of policy alternative
– Some simple determinations can provide a good idea of political feasibility

• Identify the key policy actor who can / will play important role in the process
• Cohesiveness between policy actors stated position and policy alternative
• Level of interest of policy actors to get involve in the decision making process
• Preferences of the constituencies, which politicians represent
• Likelihood of inviting some controversy
• Media attention on the policy issue
 Policy Analysis
• Ethical Analysis
– Following five principles are used for ethical
analysis of any policy alternative

• Integrity
• Competence
• Responsibility
• Respect
• Concern
 Policy Analysis
• Ethical Analysis

– Ethical Analysis involves following steps

• Ethical Problem definition

• Ethical Construction and selection of alternatives
• Ethical Selection of Criteria
• Ethical Prediction of Outcomes
• Decision to uphold ethical values
 STEP FIVE [Draw Conclusions]

• On the basis of the foregoing stage of Policy

Analysis process, policy options are listed with
respect to their relevance with the objective /
goals
Thank You