Cost-Benefit Analysis with a Tone-deaf Ear The Benefits of Smoking in the Czech Republic In 2001, the consulting firm Arthur D. Little released the results of a study commissioned by the cigarette manufacturer, Philip Morris, on the effects of smoking on the Czech economy. Taking into account both the costs and benefits of smoking, the report concluded that by virtue of revenues from taxes on cigarettes and the reduced costs of health care, pensions, and housing subsidies resulting from early mortality, smoking produced a net gain of about $148 million to the Czech government. What was wrong with Arthur D. cost-benefit analysis? Little’s Cost-Benefit Analysis Problem A high-crime city is concerned about the high rate of recidivism among young men released from prison: historically, about 30% are reincarcerated for violation of parole or for conviction of a new crime within 2 years of release. The of corrections is considering funding a new program, run by a city’s commissioner nonprofit organization, that provides counseling and job training and placement to these young men upon their release from prison. The commissioner seeks your advice about whether and at what cost per client it should support the organization, and provides you with the following information. The city measures the marginal cost of a prisoner in terms of the number of “bed that he is in prison. days” It costs the city approximately $150 per bed day. The program counsels new-released prisoners for 1 year. We have data on two cohorts for the several years that the program has been in operation: their average rate of reincarceration 2 years after release has been 15%, or half of the historic average. What further information about (1) the effectiveness of the program and (2) the costs and benefits for various stakeholders do you need to properly advise the program’s commissioner? With respect to (1) focus questions involving evaluating the effectiveness. program’s With respect to (2) begin by identifying all relevant costs and benefits. === === IV – Decision Making Under Risk and Uncertainty Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes. Franklin, letter to Jean-Baptiste Leroy, 1789 —Benjamin
Cost-Benefit Analysis with a Tone-deaf Ear The Benefits of Smoking in the Czech Republic In 2001, the consulting firm Arthur D. Little released the results of a study commissioned by the cigarette manufacturer, Philip Morris, on the effects of smoking on the Czech economy. Taking into account both the costs and benefits of smoking, the report concluded that by virtue of revenues from taxes on cigarettes and the reduced costs of health care, pensions, and housing subsidies resulting from early mortality, smoking produced a net gain of about $148 million to the Czech government. What was wrong with Arthur D. Little’s cost-benefit analysis? Cost-Benefit Analysis Problem A high-crime city is concerned about the high rate of recidivism among young men released from prison: historically, about 30% are reincarcerated for violation of parole or for conviction of a new crime within 2 years of release. The city’s commissioner of corrections is considering funding a new program, run by a nonprofit organization, that provides counseling and job training and placement to these young men upon their release from prison. The commissioner seeks your advice about whether and at what cost per client it should support the organization, and provides you with the following information. The city measures the marginal cost of a prisoner in terms of the number of “bed days” that he is in prison. It costs the city approximately $150 per bed day. The program counsels new-released prisoners for 1 year. We have data on two cohorts for the several years that the program has been in operation: their average rate of reincarceration 2 years after release has been 15%, or half of the historic average. What further information about (1) the effectiveness of the program and (2) the program’s costs and benefits for various stakeholders do you need to properly advise the commissioner? With respect to (1) focus questions involving evaluating the program’s effectiveness. With respect to (2) begin by identifying all relevant costs and benefits. === === IV – Decision Making Under Risk and Uncertainty Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes. —Benjamin Franklin, letter to Jean-Baptiste Leroy, 1789
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