What Are the Different Types of Economic Decision Analysis?

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  • Written By: Jan Fletcher
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  • Last Modified Date: 07 March 2017
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The different types of economic decision analysis can generally be divided into regulatory, social, and commercial arenas. Economic decision analysis may be applied to publicly funded projects, as well. Some overlap among the four areas is often unavoidable, since economic activity in these different areas is frequently intertwined. Stakeholders often play a significant role in using economic data to argue for a particular decision to be made. The impact of resource abundance or depletion may also be measured through a cost-benefit analysis.

Economic decision analysis includes setting a boundary of what will be analyzed, and ranking options per the economic impact. Without an analysis, people will not understand the true cost of taking action versus maintaining the status quo. This field is also referred to as applied economics.

In the commercial realm, economic decision analysis is typically used to measure profitability and efficiency. This type of analysis has typically proved useful in improving profit margins when areas of inefficiency are revealed through the analysis. Subsequently, costs may be reduced through such gains in efficiency.

Economic factors often impact regulatory action. Policing agencies may enact and enforce laws in an attempt to balance benefits with anticipated costs. Weighing the economic factors may provide justification to regulate an activity that had previously been unregulated.

For example, analyzing the cost and benefits of studded tires may reveal that the damage to public infrastructure outweighs the prevention of accidents in terms of the overall costs. Often, social, commercial, and regulatory factors are intertwined in complex fashion. This may be one reason why obtaining a pure economic analysis untainted by social and political factors is often difficult.

Social patterns of behavior may be analyzed as to their economic impact, too. For example, when large numbers of people adopt new behaviors, public health may improve or decline. The popularity of cigarettes, which many believed has been enhanced through limited regulation and widespread advertising, has been subjected to intensive economic decision analysis. A result has often been increased regulations undertaken, in many cases, in an effort to mitigate the health care costs incurred by a society.

Frequently, there are areas of overlap among the different types of economic decision analysis, since virtually every economic decision proves difficult to isolate into one well-defined area of influence. This is why stakeholders are often consulted, and may also be actively involved in an economic decision analysis. Calculating the costs and benefits of complex investments, such as transportation infrastructure, often proves very difficult. As a result, there is frequently significant public discourse over the economic impacts of large-scale public investments. An unbiased and accurate economic decision analysis may be an elusive target, when all the factors are considered.


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Post 3

@SteamLouis-- But how can we put a price tag on health. Isn't that unethical? This is my problem with cigarette warnings too. If the government is making a law to issue those warnings because it is losing money, rather than because people are getting ill, that's just sad. We can't measure social consequences in monetary terms. Sometimes we have to what's economically inefficient because it's the right thing to do. If we truly care about people's welfare, we should ban tobacco or make it too expensive for people to afford. Would the government allow the selling of a deadly medication just to make money? Tobacco is the same, it just takes longer to kill.

Economic decision analyses may give the most efficient or cost-effective solution. But that solution isn't always morally right.

Post 2

@fBoyle-- I'm not an expert on this topic but as far as I understand, economic analyses are always done with quantitative information. The cost is always measured as financial cost.

So let's say that you are doing an economic decision analysis on GMO foods. You will look at the benefit (profit) of producing genetically modified foods and then you will look at the costs. The cost could be the negative effects of these foods on human health. How will you measure that? You will measure it as health care costs. For example, if more people are getting food allergies or cancer because of these foods, you can calculate the costs these illnesses incur on the system because people are

requiring more health care.

When you compare the benefit of GMO foods with these costs, it should give you a good idea of whether it is worth it to produce these foods. This is the same idea behind cigarette warnings the article also mentioned.

Post 1

I understand cost-effectiveness analysis. It shouldn't be too difficult to calculate for businesses since it's just about comparing costs of different options. But when it comes to social projects that involve costs in the form of public services, I don't understand how the social factors are calculated. What if the consequence cannot be measured in dollars? What if costs are not quantitative?

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