Question

How would you determine cost-effectiveness or a cost-benefit approach? If I want to purpose a hypothetical proposal to allow a $5,000 tax deduction for expenses incurred by children who take care of their elderly parents?

Answer 1

Cost-Benefit Analysis:- A cost-benefit analysis considers all factors associated with any project to determine its potential profitability, including any costs that go into developing, implementing and executing the project strategy. The analyst researches the potential financial benefits and subtracts the costs. It is possible to account for intangible costs such as opportunity costs that affect the potential profits as a way to project potential return on investment data.

Cost-Effectiveness Analysis:- A cost-effectiveness analysis is used when a cost-benefit analysis is not a viable analysis option because you can't place value on the outcome. This method is most commonly used in health care when evaluating various treatment plans. Providers can assess the cost of a given course of action such as physical therapy versus surgery. However, it is difficult to predict and value outcomes because patient success and obstacles are all unique and different.

Choosing an Analysis Method:-

When you look at a new program, consider how you should analyze its potential. If you can place a value on all components of the result, you can do a cost-benefit analysis. When you are unable to monetize the result, a cost-effective analysis provides some insights into potential success.

For example, a day care can create a budget to add a building to its program. The costs, while estimated, are hard costs and become a valid resource to determine overall expenses. The day care can factor the new capacity for the building, so it knows how many more children it can serve and generate revenue from. This is the basis of a cost-benefit analysis.

If the example is not a day care but a government-run after-school program designed to keep at-risk youth off the streets, the costs might be easy to estimate, but the outcome for success isn't. This is the basis of a cost-effectiveness analysis.