PPA 691 Seminar in Public Policy Analysis

1
PPA 691 Seminar in Public Policy Analysis

• Lectures 7 8 Recommending Policy Actions.

2
Recommendation in Policy Analysis

• The policy-analytic procedure of recommendation
  enables analysts to produce information about the
  likelihood that future courses of action will
  result in consequences that are valuable to some
  individual, group, or society as a whole.

3
Recommendation in Policy Analysis

• The procedure of recommendation involves the
  transformation of information about policy
  futures into information about policy actions
  that will result in valued outcomes.
• Policy recommendations are normative (advocative)
  rather than empirical (descriptive) or evaluative.

4
Recommendation in Policy Analysis

• Characteristics of advocative claims.
• Actionable Advocative claims focus on actions
  that make be taken to resolve a policy problem.
• Prospective Advocative claims occur prior to the
  time that actions are taken.
• Value laden Advocative claims require both that
  actions have the predicted consequences, but also
  that those consequences have value for society.
• Ethically complex Advocative claims can be
  intrinsic (valued as ends in themselves) or
  extrinsic (valued because they will produce some
  other value).

5
Recommendation in Policy Analysis

• Simple model of choice.
• Advocative claims are only possible when the
  analyst is confronted by a situation of choice
  between two or more alternatives.
• Simple model.
• The definition of a problem requiring action.
• The comparison of consequences of two or more
  alternatives to resolve the problem.
• The recommendation of the alternative that will
  result in a preferred outcome.

6
Recommendation in Policy Analysis

• Simple model of choice.
• Conditions for choice.
• Single decision maker.
• Certainty.
• Immediacy of consequences.

7
Recommendation in Policy Analysis

• Complex model of choice.
• Conditions.
• Multiple stakeholders.
• Uncertainty about outcomes.
• The passage of time between actions and
  consequences.
• Results.
• Intransitivity of choice.

8
Recommendation in Policy Analysis

• Forms of rationality.
• Given the conditions of complex choice, there are
  multiple forms of rationality.
• Technical rationality.
• Economic rationality.
• Legal rationality.
• Social rationality.
• Substantive rationality.

9
Recommendation in Policy Analysis

• Rational-comprehensive theory.
• An individual or collective decision-maker must
  identify a policy problem on which there is a
  consensus among all relevant stakeholders.
• An individual or collective decision-maker must
  define and consistently rank all goals and
  objectives whose attainment would represent a
  resolution of the problem.
• An individual or collective decision-maker must
  identify all policy alternatives that may
  contribute to the attainment of each goal and
  objective.

10
Recommendation in Policy Analysis

• Rational-comprehensive theory.
• An individual or collective decision-maker must
  forecast all consequences that will result from
  the selection of each alternative.
• An individual or collective decision-maker must
  compare each alternative in terms of its
  consequences for the attainment of each goal and
  objective.
• An individual or collective decision-maker must
  choose that alternative that maximizes the
  attainment of objectives.

11
Recommendation in Policy Analysis

• Disjointed incremental theory.
• Consider only those objectives that differ
  incrementally from the status quo.
• Limit the number of consequences forecast for
  each alternative.
• Make mutual adjustments in goals and objectives,
  on the one hand, and alternatives on the other.
• Continuously reformulate problems and hence
  goals, objectives, and alternatives in the
  course of acquiring new information.

12
Recommendation in Policy Analysis

• Disjointed incremental theory.
• Analyze and evaluate alternatives in a sequence
  of steps, such that choices are continuously
  amended over time, rather than made at a single
  point in time.
• Continuously remedy existing social problems,
  rather than solve problems completely at one
  point in time.
• Share responsibilities for analysis and
  evaluation with many groups in society, so that
  the process of making choices is fragmented or
  disjointed.

13
Recommendation in Policy Analysis

• Arrows impossibility theorem.
• It is impossible for democratic decision makers
  in a democratic society to meet conditions of the
  rational comprehensive model.
• Individual choices cannot be aggregated through
  majority voting procedures to create a collective
  decision that will produce a single best solution
  for all parties.

14
The Voters Paradox
15
Recommendation in Policy Analysis

• Arrows impossibility theorem.
• Reasonable conditions for democratic decision
  procedures.
• Nonrestriction of choices.
• Nonperversity of collective choice.
• Independence of irrelevant alternatives.
• Citizens sovereignty.
• Nondictatorship.

16
Recommendation in Policy Analysis

• Bounded rationality.
• Decision makers engage in satisficing behavior
  (identify courses of action that are good
  enough.).
• Consider the most evident alternatives that
  produce a reasonable increase in benefits.
• Rationality as constrained maximization.
• Rational choice within the boundaries of
  constraint.

17
Recommendation in Policy Analysis

• Criteria for policy recommendation.
• Effectiveness does a given alternative result
  in the achievement of a valued outcome (technical
  rationality).
• Efficiency the amount of effort needed to
  produce a given level of effectiveness (economic
  rationality).
• Adequacy the extent to which any given level of
  effectiveness satisfies the needs, values, or
  opportunities that gave rise to the problem.
• Fixed costs and variable effectiveness (type I,
  maximize effectiveness).
• Fixed effectiveness and variable costs (type II,
  minimize costs).
• Variable costs and variable effectiveness (type
  III, efficiency).
• Fixed costs and fixed effectiveness (type IV, do
  nothing).

18
Recommendation in Policy Analysis

• Criteria for policy recommendation.
• Equity the distribution of effects and effort
  among different groups in society (legal and
  social rationality).
• Maximize individual welfare.
• Protect minimum welfare.
• Maximize net welfare.
• Maximize redistributive welfare.
• Responsiveness satisfies the needs,
  preferences, or values of particular groups.
• Appropriateness the value or worth of a
  programs objectives and the tenability of
  assumptions underlying these objectives.

19
Approaches to Recommendation

• Public versus private choice.
• Nature of public policy processes.
• Numerous stakeholders with conflicting values.
• Collective nature of public policy goals.
• Multiple conflicting criteria for choice.
• Nature of public goods.
• Specific, collective, and quasi-collective goods.
• Supply and demand (market mechanisms).
• Discuss.

20
Approaches to Recommendation

• Public choice.
• Problems with supply demand models of public
  policy.
• Multiple legitimate stakeholders.
• Collective and quasi-collective goods.
• Limited comparability of income measures.
• Public responsibility for social costs and
  benefits.

21
Approaches to Recommendation

• Benefit-cost analysis.
• Characteristics.
• Measure all costs and benefits to society of a
  program including intangibles.
• Traditional benefit-cost analysis emphasizes
  economic rationality net benefits are greater
  than zero and higher than alternative uses.
• Traditional benefit-cost analysis uses the
  private marketplace as the point of departure in
  recommending programs.
• Social benefit-cost analysis also measures
  redistributional benefits.

22
Approaches to Recommendation

• Types of costs and benefits.
• Inside versus outside costs and benefits.
• Tangible versus intangible costs and benefits.
• Direct versus indirect costs and benefits.
• Net efficiency versus redistributional benefits.

23
Approaches to Recommendation

• Tasks in benefit-cost analysis.
• Problem structuring.
• Specification of objectives.
• Identification of alternative solutions.
• Information search, analysis, and interpretation.
• Identification of target groups and
  beneficiaries.
• Estimation of costs and benefits.
• Discounting of costs and benefits.
• Estimation of risk and uncertainty.
• Choice of decision criterion.
• Recommendation.

24
Benefit-cost and Cost-effectiveness Analysis

• Benefit-cost analysis is an applied branch of
  economics that attempts to assess service
  programs by determining whether the total
  societal welfare has increased (in aggregate more
  people have been made better off) because of the
  project or program.
• Steps.
• Determine the benefits of a proposed or existing
  program and place a dollar value on those
  benefits.
• Calculate the total costs of the program.
• Compare the benefits and costs.

25
Benefit-cost and Cost-effectiveness Analysis

• Simple steps pose real challenge, especially
  estimating intangible benefits.
• Procedure still useful in uncovering assumptions
  and estimating value of intangibles.

26
Benefit-cost and Cost-effectiveness Analysis

• Cost-effectiveness analysis.
• The major costing alternative to benefit-cost
  analysis.
• Relates the cost of a given alternative to
  specific measures of program objectives.
• For example, dollar per life saved on various
  highway safety programs.
• Often the first step in a benefit-cost analysis.
• Especially useful if analyst cannot quantify
  benefits, but has fairly specific program
  objectives.
• Key problem situation where there are multiple
  benefits. Results often very subjective.
• 2nd key problem does not produce a bottom line
  number.

27
Benefit-cost and Cost-effectiveness Analysis

• A private sector analogy.
• Benefit-cost analysis similar to financial
  analysis in private sector.
• Should the firm have done the project at all,
  i.E., Is the project producing a satisfactory
  rate of return?
• Public version is the program a success, i.E.,
  Has it improved social welfare?
• What other options are there for the use of the
  firms resources?
• Public version should the program be continued
  when weighed against alternative uses for the
  governments funds.

28
Benefit-cost and Cost-effectiveness Analysis

• A private sector analogy.
• Benefits and costs do not occur simultaneously in
  either private or public sector.
• RD costs, marketing, capital investment,
  training.
• Government not priced, thus benefits are more
  broadly defined.
• Alternative uses of resources (opportunity costs).

29
Benefit-cost and Cost-effectiveness Analysis

• Benefit-cost illustration.

30
Benefit-cost and Cost-effectiveness Analysis

• Formula for net present value.
• Formula sensitive to choice of rate of return.
• Could also use return on investment.
• Discount rate that would make the present value
  zero.

31
Benefit-cost and Cost-effectiveness Analysis

• Continuing or not continuing the project.

32
Benefit-cost and Cost-effectiveness Analysis

• Total versus marginal benefits and costs.
• When considering the overall profitability of a
  project, an agency will consider the total costs
  involved in getting the project started through
  its operations cycle.
• But at any point in time, when an agency is
  continuing or discontinuing a project or program,
  it only considers the marginal costs or benefits.
• Definitions.
• Marginal cost incremental cost of producing one
  more unit of output.
• Marginal benefit incremental benefit of that one
  unit of output.
• Public sector usually does not do it on the basis
  of a single unit, but what are the benefits being
  generated now versus the costs now?

33
Benefit-cost and Cost-effectiveness Analysis

• Public-private sector differences and
  similarities.
• Similarities alternative uses for funds,
  one-time costs, recurring costs, land, labor,
  capital.
• Differences.
• Distributional considerations.
• Spillovers.

34
Framework for Analysis
35
Framework for Analysis

• Real benefits and costs versus transfers.
• Real net gains and losses to society.
• Transfers merely alter the distribution of
  resources in society.

36
Framework for Analysis

• Direct and indirect benefits and costs.
• Direct costs and benefits are closely related to
  the primary objectives of the project.
• Direct costs personnel, facilities, equipment,
  material, project administration.
• Indirect costs and benefits are byproducts,
  multipliers, spillovers, or investment effects.
• Indirect costs are unintended costs that result
  from government action.
• Indirect benefits might include benefits of space
  exploration.

37
Framework for Analysis

• Tangible and intangible benefits and costs.
• Tangible benefits and costs can be converted
  readily into dollar figures.
• Intangible benefits and costs are those things
  that cannot be directly assigned an explicit
  price.
• Determining the geographic scope of analysis.
• Spillover effects may determine true geographic
  jurisdiction.

38
Framework for Analysis (Agricultural Dam Example)
39
Measuring Benefits

• Evaluation problem difficult for government
  because of multiple benefits and intangibles.

40
Measuring Benefits

• Sources of data.
• Existing records and statistics kept by agency.
• Feedback from clients.
• Ratings by trained observers.
• Experience of other governments or private or
  nonprofit corporations.
• Special data gathering.
• Whenever possible analyst should use market value
  or willingness to pay.

41
Measuring Benefits

• Valuing benefits.
• Cost savings.
• Time saved.
• Lives saved.
• Increased productivity or wages.
• Recreational benefits.
• Land values.
• Alternatives to market prices.
• See handout.

42
Measuring Costs

• Cost categories.
• One-time, fixed, or up-front costs.
• Ongoing investment costs.
• Recurring costs.
• Compliance costs.
• Mitigation measures.

43
Measuring Costs

• Valuing indirect costs.
• Flat overhead figure.
• Does the project actually costs increased
  administrative burden?
• Costs to the private sector.
• Valuing the use of capital.
• Valuing the damage effects of government
  programs.
• Other cost issues.
• Sunk costs.
• Interest costs.

44
Analysis of Benefits and Costs

• Framework.
• Retrospective.
• Snapshot.
• Prospective.

45
Analysis of Benefits and Costs

• Importance of using present value.
• Choice of an appropriate discount rate.
• Private sector rate.
• Low social discount rate.
• Long-term treasury bill rates.
• Adjustment for inflation.

46
Analysis of Benefits and Costs

• Presenting the results.
• Net present value (B-C).
• Benefit cost ratio (B/C).
• Return on investment (discount rate to reduce
  present value to zero).
• Appropriate perspective.
• Costs and benefits vary across stakeholders.
• May conduct analyses from several perspectives.

47
Analysis of Benefits and Costs

• Sensitivity analysis.
• Use spreadsheet analysis to vary the assumptions.
• Intangibles.
• Relate intangibles to dollar results if there
  are net costs, do the intangible benefits
  overcome the deficit?
• Particular problems.
• Equity concerns (weighting of values).
• Multiple causation and co-production problems.