Understanding Cost-Benefit Analysis

A common approach to economic evaluation is cost-benefit analysis (CBA), which shows whether the social benefits of an activity exceed its social costs; the costs and the resulting benefits to society are monetized to determine whether there is a net social benefit (NSB) (McDavid, Hawthorn, & Huse, 2013). The CBA approach is used extensively in North America to determine “value-for-money” and “return on investment (ROI) in public expenditures in many public sectors, including education, healthcare, and recently, libraries.

Economic evaluations use a quantitative approach, using numerical data. Total economic impact is the sum of 3 elements:

  • Institution budgets provide the “direct spending” data, expressed in dollars.
  • System data such as circulation, holdings, program attendance, technology use, and so on provide the “direct benefit” activities, expressed in number counts. A monetary value is assigned to the direct benefit activity data to calculate the dollar value that the activities contribute to the local economy.
  • Indirect benefits are the result of the multiplier effect on direct spending: a dollar paid to a contractor for a branch renovation is re-spent in the community, and so on. The single dollar creates additional benefits across the community. Multipliers are used to estimate the actual dollar amount based on spending.

Together, these three elements provide an estimate of the total impact on the economy.

A Note About Causal Analysis

A common evaluation question is whether or not the activities being examined produced or caused the observed and intended outcomes. It is difficult to prove a cause and effect relationship between any given activity and the outcome because there are many other activities and conditions at play within the same time and space. While evaluators are reluctant to prove causality, the evaluation process is able to confidently demonstrate that the activities contribute to, or correlate with, the observed outcomes (McDavid, Hawthorn, & Huse, 2013).

Prepared by
Kimberly Silk, MLS | kim@brightsail.com