AN OVERVIEW OF COST-BENEFIT ANALYSIS
Cost-benefit analysis has long been used by various government agencies to evaluate different public programs. The US Army Corps of Engineers was one of the earliest users of the tool, employing cost-benefit analysis to evaluate such physical investment projects as the dredging of harbors, construction of canals and waterways, and flood control. Indeed, the US Flood Control Act of 1939 specified the standard that "the benefits to whomever they accrue [be] in excess of the estimated costs" (Gramlich 1981, 7). In the 1960s cost-bene fit analysis began to be applied to a much wider range of projects involving investment in human beings (human capital), as well as physical investment programs. This was due in part to President Lyndon Johnsons Great Society
efforts to get the federal government actively involved in fighting poverty, creating jobs, and providing education and training. As the government moved into these new areas of activity, concerns arose about which type of programs pro vided the greatest return for the dollars invested. The use of cost-benefit analysis
was also related to the form installation of the planning, programming, and
budgeting system (PPBS) in federal government agencies during the 1960s. Although the PPBS system was no longer being used formally by the mid- 1970s, such evaluation techniques as cost-benefit and cost-effectiveness analysis survived. Indeed, in the areas of health care and environmental policy, there has been a greater emphasis on these techniques, given the concern over rising health care expenditures and the impact of environmental regulations (Wamer
and Luce 1982; Tolley, Kenkel, and Fabian 1994; Drummond et al. 2005).
The tenns benefit and cost both have very specific meanings derived from
economic theory.