Question

distinguish between cost-benefit analysis (CBA) and cost-effectiveness analysis (CEA). Can CEA replace CBA in all cases? if not, why?

Answer 1

Cost benefit analysis is an economic evaluation technique which uses monetary values to measure the benefit whereas the cost effectiveness analysis is based on evaluation through natural units or through non monetary methods.

The formula for CBA is benefits less cost which is expressed in monetary terms while CEA is expressed in increased quality of life or costs per quality adjusted life years(QALY).

Also in CBA Externalities are considered while they are not considered in CEA.

CEA is mostly about the health sector, measuring the quality of life, increased life years etc while CBA is in a variety of sectors which could be health, investment projects etc.

Thoug CEA is a better measure than CBA ,it cannot replace CEA in all cases. CBA is mostly used where monetary values are given and where the monetary value doesn't exist , CEA is used. But CEA is used neglecting the externalities ie it doesn't give the complete picture including the externalities.

Also CEA is mostly limited to health sector and if one needs to deal with financial sector to see the viability of a project, CBA is more appropriate.