An Interactive Example: Selecting a Vacation | CDC Econ Eval Tutorials (E)

What Do Vacations and Economic Analyses Have in Common?

Economic evaluations give us criteria for deciding between alternative strategies that have different costs or consequences.

We will use a simple nonhealth-related example, selecting a vacation, to illustrate how to perform an economic evaluation.

You will see that the majority of the steps (and a substantial part of the effort) are related to framing the study — developing a framework to guide the data collection and analysis efforts.

The Sample Problem

Suppose you are a single person; you have a 1–week leave from work, and you need to decide which of the following two alternatives you want to select for this year's leave.

A.		Use your week's paid leave to take a 1–week cruise vacation.
B.		Take no leave, stay at work, and, at the end of the year, get paid for the week of leave that you did not take. (That extra week's pay will be in addition to your normal yearly pay.)

How do you decide which is the better choice?

The Questions You Might Ask To Decide

We will ask the same questions that we would ask in an economic evaluation of more complex health-related situations.

A "no" answer to any of the yes/no questions will cause us to discontinue the analysis; for the other types of questions, we must obtain the information to continue.

Q1. Is the Problem Well-Defined?

You need a firm idea of the problem and alternatives for its solution to proceed.

In our case, the problem, which of the two alternatives to choose, is simple, and the alternatives are well-defined.

Q2. Is the Problem Important?

We do not want to spend our time and resources on unimportant issues.

Selecting what you will do for your single week of leave is, we assume, important enough to analyze, so we will answer "yes".

Q3. Would an Economic Analysis Help You Decide Which Is the Better Choice?

If other factors exist that render the economic issues irrelevant, then proceeding with the analysis is probably not of value.

A factor in this example might be that you have such a strong social commitment to go on the cruise with friends or relatives that you will do it regardless of the economic consequences.

Let us assume that economics is important for this choice. Therefore, we will proceed.

Q4. From Whose Point of View Should You Do Your Analysis?

For these alternatives, the analysis should probably be done from just your own point of view. If someone else will be affected by your decision, you would have to consider the consequences to them. And if the alternatives were likely to affect society, you would have to consider the effect on society in the analysis.

Let us assume that only you will be affected. So you will conduct the economic analysis from your point of view, and count only your costs and benefits.

Q5. Is Each of the Alternatives Feasible?

We do not want to consider alternatives that are not realistic candidates. The feasibility questions are different for each of the alternatives:

A.		For the cruise, do you have the resources to pay for the cruise vacation?
B.		For taking no leave, will your employer pay you for the leave you did not take?

Let us assume that you answer "yes" to each of these questions.

Q6. What Are the Benefits from Each of the Alternatives?

Benefits are the consequences of the alternatives.

Cruise benefits before and during the cruise are

having a vacation to look forward to
experiencing the cruise, including going somewhere unusual, meeting new people, participating in activities, and relaxation, and
saving your normal weekly variable expenses (e.g., food, daily transportation, and entertainment). We do not count the fixed costs (e.g., housing, vehicles, and insurance) that you must pay whether you are at home or not.

Benefits after the cruise is over are

having had a good experience,
having renewed yourself for a week, including having a better outlook and a renewed vigor at work, and
having an experience to share with others.

The benefit for taking no leave is the week's pay that you will receive at the end of the year.

Q7. What are the Costs for Each Alternative?

Costs measure the value of the resources used in each alternative.

A.		For the cruise, the costs are the cost of the cruise, transportation, and incidentals. In addition, you will forego the extra week's pay that you would have received for the leave that was not taken. This is an opportunity cost that you must count as a cost of the vacation.
B.		For taking no leave, the costs are your normal weekly variable expenses (e.g., food, daily transportation, and entertainment). (In the previous section, we counted saving these costs as a benefit of the cruise option.)

Q8. What is the Time Frame That You Should Consider for the Analysis?

The time frame is the period during which the intervention, your leave, occurs. So your 1–week leave period is the time frame.

Q9. What is the Analytic Horizon, the Time for which You Should Measure the Costs and Benefits?

The costs and benefits attributable to your leave and your vacation would occur before, during, and after the 1–week leave.

For the analytic horizon, you should choose a period that begins from the time of your decision, extends through the leave week, and continues for as long afterward as you expect the benefits and costs of the leave options to accrue.

The period must include the end of the year to encompass the extra week's pay (for taking no leave) that your employer will pay you.

Q10. Which Study Format Should We Use?

There are three study formats from which to choose.

Prospective study	In a prospective study, no costs or outcomes have been incurred when the study begins. Costs and outcomes are measured as they occur during the study.
Retrospective study	A retrospective study begins after the costs have already been incurred and the outcomes have already been realized.
Model	A model is used in a study when actual historical data is scarce or unavailable. A model provides a simplified and an as accurate as possible representation of reality.

What is the Best Study Format for Our Example?

In this case, which we are using as an example case, we will use a model format. We choose a model format because of the reasons listed below.

Your leave is a one-time occurrence, and you must make the decision before the leave occurs. Therefore, a prospective study in which you would record data after the leave starts — and then make your decision — will not be of value to you.
Presumably, you have not been faced with this decision before, so you have no recorded data on which to base a retrospective study.
The model is simple and predictable for each of your two alternatives; therefore, we would expect it to be reasonably accurate.

Q11. How Should We Measure Outcomes?

Our objective is to be able to express the economic analysis outcomes in terms of a net benefit for each alternative where

Net benefit = (Total benefits – Total costs)

This equation makes sense: the best alternative from an economic standpoint is the one with the larger net benefit.

The costs are readily expressed in dollars.

The benefits of the "take no leave" alternative are also expressed in dollars.

But the benefits of the cruise alternative are a mixture of measurements: one benefit is in dollars, whereas the rest of the benefits are in values of what you experience and feel.

How Do You Deal with the Cruise Benefits That Involve Emotion?

You can estimate the dollar values of

having a vacation to look forward to, and
experiencing the cruise.

You can also estimate the dollar values for the following items that you will realize after the cruise is over:

having had a good experience,
having renewed yourself for a week (e.g., having a better outlook and renewed vigor at work), and
having an experience to share with others.

When you express all benefits and costs in dollars, it is easy to determine the net benefit.

The Results of the Economic Analysis

We show the results of this sample economic analysis in a spreadsheet that contains example values for each benefit and cost outlined above.

A. One-week cruise
Benefits ($)		Costs ($)		Net benefit ($)
Anticipation	200	Cruise cost	1,000
Experiencing the cruise	1,000	Transportation	250
Having had the experience	300	Incidentals	180
Renewal	450	1 Extra week's pay* (foregone)	500
Experience to share	200
1 Week's living expenses** (saved)	150
Total benefits	2,300	Total costs	1,930	370

B. Take no leave
Benefits ($)		Costs ($)		Net benefit ($)
1 Extra week's pay*	500	1 Week's living expenses**	150
Total benefits	500	Total costs	150	350

Notes:

*	Both extra week's pay fields should contain the same value of weekly pay (after taxes).
**	Both week's living expenses fields should contain the same value.

For our example values:

For the cruise option, the total benefits are $2,300. Total costs are $1,930. When the total costs are subtracted from the total benefits, the net benefit is $370.
For the take no leave option, the total benefits are $500. Total costs are $150. When the total costs are subtracted from the total benefits, the net benefit is $350.
The cruise option has the larger net benefit.

What Next?

In the Series Introduction

tutorial, you will see the what, why, and how of economic evaluation in more detail. The Series Introduction tutorial will be shown in a new browser window.