Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

under examination is contemporaneously both more (or less) costly and more (or less) effective than thealternative(s) (C a –C b > 0 and E a – E b > 0 or, alternatively, C a – C b < 0 and E a – E b < 0). In this situation,the incremental cost-effectiveness ratios allow appraisers to rank the projects under examination and toidentify, and then eliminate, cases of ‘extended dominance’. This can be defined as the state when astrategy is both less effective and more costly than a linear combination of two other strategies with whichit is mutually exclusive. More operationally, extended dominance is where the incremental costeffectivenessratio for a given project is higher than that of the next more effective alternative (seeexample below).EXAMPLE: EXTENDED DOMINANCE IN COST-EFFECTIVENESS ANALYSISThe table below shows the hypothetical incremental cost-effectiveness ratios for three interventions to improve cognitivecapacity on a target of 50 children:A) self computer-based learning;B) education sessions to the whole sample target;C) education sessions to small groups (up to five people).Cost(Euros)Effectiveness(average test score)∆C ∆E ∆C / ∆EA) Self computer-based learning 1,000 10 -- -- 100B) Education sessions to the whole6004,000 15 3,000 5sample target(extended dominance)C) Education sessions to small groups9,000 40 5,000 25 200(up to five people)In our example, strategy B is a case of extended dominance because strategy C has a lower cost-effectiveness ratio (200