Alternatives to cost-benefit analysis

Q. Performing a cost-benefit analysis may seem like a straight forward mathematical exercise; however, there are large uncertainties factored into the equation which may drastically influence the result of the calculation. What are some of these factors?

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Cost-benefit analysis was originally developed as a tool for evaluating development projects - and work best when the costs and the benefits are calculated in the same terms. But disaster mitigation projects are not solely about economic benefits. The risk parameters being considered are multidimensional, as listed earlier. Their benefits are measured not only financially, but in other terms as well, such as lives saved, injuries prevented, social disruption avoided, and environmental impact reduced. The difficulties of cost-benefit analysis in dealing with saving life shows the problems with a unidimensional approach to risk analysis. Risk analysis that presents risk to life in one equation, economic losses in other and even further dimensions of the problem including environmental impact and the rest separately is still useful.

It allows us to make informed decisions. Procedures which prescribe decisions appear far less useful than those that provide information to assist decisions to be made.

Goal-orientated risk reduction

Cost-benefit analysis chooses the appropriate level of protection according to a minimum cost criterion; in other words it is assumed that the best level of protection to choose is that which minimises overall cost. It has been shown above that acceptable levels of risk are decided by societies on the basis of perceived risk, and that perceived risk is only partly determined by the actual exposure level. Priorities are assigned and preferences made on the basis of a wide range of cultural influences.

Where a community is capable of agreeing what levels of consequences it would find acceptable (or in fact defining the consequences it would find unacceptable) these criteria can be used to define the appropriate level of protection. The community is effectively defining its goals or the target levels of risk it would like to achieve at some future date - the exact level of risk may be unimportant.

This goal-orientated approach is the one which is implicitly adopted in the formulation of many building codes for example. The seismic building codes in California state explicitly that the level of resistance to be designed for is based on the concept of an acceptable risk, and what is taken to be acceptable is that buildings designed according to the code should:²⁹

1. resist minor earthquakes without damage

2. resist moderate earthquakes without significant structural damage, but with some non-structural damage, and

3. resist major or severe earthquakes without major failure of the structural framework of the building or its equipment, and maintain life safety.

Once the meaning of 'minor', 'moderate' and 'major' earthquakes has been more precisely established in terms of earthquake severity or intensity levels, the above criteria can become the basis for defining suitable levels of protection. Many other countries have now adopted the same philosophy for their building codes, or used the same rules without explicitly acknowledging the philosophy.

But the procedure implies that the acceptable level of risk has already been defined. How is it possible to decide whether this level of risk is right, too high, or too low? One method proposed is to use the concept of balanced risk, using as a decision criterion the level of risk which is acceptable in other similar risks activities. Another is to try to determine an acceptable rate of trade off between life-safety and capital cost, again with reference to other areas of human activity in which money is spent to protect life. These procedures will be further discussed below.

Balanced risk criterion

The approach to risk reduction using the balanced risk criterion attempts to equalise the levels of risk which are accepted in society in a range of comparable activities. As in the studies of risk described in the first section of this module, risks of death to an individual can be grouped into two general categories - those associated with voluntary activities, and those associated with involuntary activities, and into further sub-groups of similar risks, like natural disasters, transportation, technological and so on. It has been suggested for instance mat the acceptable risk from technological systems from which considerable benefits are obtained approaches that due to disease in society as a whole, while that from uncontrollable (and totally non-beneficial) natural disasters may be 1,000 to 10,000 times lower.³⁰

Cost-effectiveness criterion

An alternative decision-making criterion is available which incorporates both economic costs and life-safety, but without making an explicit valuation of human life. For a range of possible strategies, the financial costs and benefits are assembled, but without including a valuation of human life. The expected benefits in terms of saved human lives, and saved injuries, are calculated separately. The financial cost per saved life is also calculated, or the marginal cost in comparing one level of protection with an alternative adjacent one.³¹ Decision-makers are then faced with choosing between the projects on the basis of these separate attributes, and may use the cost per saved life as an indicator of the cost effectiveness of a particular policy in terms of life saving.

Table 7
Estimated costs and benefits of alternative rural housing improvement strategies in eastern Turkey to reduce earthquake losses

IMPROVEMENT STRATEGIES TO REDUCE EARTHQUAKE LOSSES³²

(a) Costs in Turkish Lire, 1983. (250 TL to US$ in 1983).

(b) Reconstruction costs are estimated at 3.5 × 10⁶ TL per house, so the least cost strategies will actually save more over the 25 year period than they cost.