Cost-effectiveness asks which option delivers a target outcome at the lowest cost. It is especially useful when outcomes are clear but assigning a full monetary value to benefits is difficult.
Core Mechanics
A basic ratio is:
[ \text{Cost-Effectiveness Ratio} = \frac{\text{Total Cost}}{\text{Units of Outcome}} ]
For comparing two alternatives, analysts often use an incremental ratio:
[ \text{ICER} = \frac{C_1 - C_0}{E_1 - E_0} ]
where (C) is cost and (E) is effectiveness.
Policy Context
Public health, education, and social-policy agencies use cost-effectiveness when budgets are binding and outcomes are multidimensional. It helps rank interventions even when full welfare valuation is unavailable.
Limits
A low ratio does not automatically imply social optimality. Distributional impacts, implementation constraints, and long-run spillovers still matter for final policy choice.