What is the Difference Between Cost Effectiveness Analysis and Cost Benefit Analysis?

Cost-Effectiveness Analysis (CEA) and Cost-Benefit Analysis (CBA) are two distinct decision analysis techniques used to evaluate the value of an intervention or project. They differ in the way they measure and compare costs and benefits, as well as in their applications and purposes. Key differences between CEA and CBA include:

1. Measurement of Benefits: In CBA, the benefits are quantified in monetary terms, while in CEA, the benefits are expressed in non-monetary terms.
2. Purpose: CBA is used to estimate the total expected benefits of a program compared to its total expected costs, aiming to quantify all costs and benefits in monetary terms. On the other hand, CEA is used to compare the relative cost of two or more programs or projects, focusing on the cost per effect or outcome.
3. Applications: CBA is suitable for projects that aim to generate social surplus or profits, such as infrastructure projects, economic development initiatives, and other large-scale projects. CEA is primarily used in the healthcare system, pharmaceuticals, and other sectors where the primary goal is to improve human lives or well-being, rather than to generate financial returns.
4. Calculation: The formulas for calculating the two methods are different. In CBA, the net benefits are calculated as Benefits ($) - Costs ($) (also known as "net benefits") or Benefits ($) / Costs ($) (also known as "benefit ratio"). In CEA, the cost-effectiveness is calculated as Costs ($) / Outcome.

In summary, CBA is used to determine whether the economic benefits of a project outweigh its economic costs, while CEA focuses on comparing the relative cost of achieving specific outcomes across different programs or projects. The choice between CEA and CBA depends on the project's objectives, scope, and the nature of the costs and benefits being evaluated.

Comparative Table: Cost Effectiveness Analysis vs Cost Benefit Analysis

Here is a table comparing the differences between Cost-Effectiveness Analysis (CEA) and Cost-Benefit Analysis (CBA):

In summary, cost-effectiveness analysis focuses on finding the most efficient way to achieve a specific outcome, while cost-benefit analysis aims to determine whether the economic benefits of a project or intervention outweigh its costs. The choice between the two methods depends on the nature of the project and the type of industry.