A cost-effectiveness analysis (CEA) is a version of a cost benefit analysis where the analysis is focused towards a specific goal and tries maximize the benefit to cost ratio to find the least costly way to meet an objective.
A CEA could be used with regards to healthcare systems and national defence policy when the priority is to keep costs low, systems efficient and maximize benefits. Cost-benefit analysis' (CBA) have difficulty with accurately estimating the true size of social costs and benefits. CEAs tend to estimate costs and benefits through methods other than dollar amounts. For example, healthcare and defence policy makers measure the costs benefits in terms of how many lives a policy can save compared to how lives could be lost otherwise. Effectiveness is measured in a unit applicable to the situation whereas CBA are measured purely in dollars.
A CEA can be used to evaluate and compare a number of options to determine what course of action will be the most effective with the specific goal in mind. CEAs are tailored to a specific objective and do not use universal indicators like a CBA does. A CBA evaluates projects in terms of dollars but a CEA uses units specific to the goal. The cost is usually assessed in a dollar amount but the final is a unit specific to the case.
If a policy is designed to reduce the amount of carbon dioxide in the atmosphere, the effectiveness of a project would be measured in dollars per ton of carbon removed, the dollar being the cost of the measure taken to reduce the carbon. Another policy designed to save lives in a hospital would be measured in lives saved. Due to these differences, CEA cannot be compared as CBA can because they are expressed in dollar amounts.
To determine the cost-effectiveness of a project, the cost of an alternative is divided by the effectiveness of the project.
Assume that a city is heavily polluted, every year 50 people die from respiratory illness caused from the air pollution. There are 2 options that the city has to mitigate the effects of the pollution:
The city can invest in their energy infrastructure to switch to modes of electrical generation to reduce the amount of air pollution in the city, this comes at a cost of $10 million and will save an estimated 40 lives:
The city can invest $7 million more dollars into a respiratory health clinic specifically designed to address the problem which is estimated to save the same amount of lives:
Among the competing options, option 2 is the most cost effective because it has the lowest cost to meet the objective. While both programs are beneficial, option 2 saves more lives per dollar than option 1.
With a regular CBA both options are plausible because they are socially profitable but only with a CEA do we discover which is the optimal choice of the two to keep those with respiratory illnesses alive.