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1 Specify the concept of costs in terms of opportunity costs.

2 Define cost terms for educational interventions.

3 Relate costs to the theory of change.

4 Distinguish between cost information and budgetary data.

5 Provide motivation for performing cost analysis.

To most of us, the notion of cost is something that is both as obvious as the price of a good or service and as mysterious as the columns of data on an accounting statement or budget. In this chapter, we will introduce a concept of costs that will differ somewhat from both of these, and we will discuss in detail how an education analyst might think about costs. Any social intervention or program has both an outcome and a cost. The outcome refers to the result of the intervention. Outcomes of educational interventions include such common indicators as higher student achievement, fewer dropouts, improved attitudes, greater employability, and so on. But why are all interventions associated with costs, and what is meant by costs?

For an economist, understanding the costs of an educational program is a way of understanding how the program works in relation to its theory of change (Hummel-Rossi & Ashdown, 2002). For example, if we know that one of the costs of a new instructional program is the wages paid to a highly trained teacher, we would expect the effects of the program to be mediated through the teacher’s competence. As an even easier example, if a new curriculum intervention requires no extra teacher training and no new facilities but simply the substitution of the old textbook by a new textbook, the extra cost will be very low; consequently, we might not expect a very significant effect on academic outcomes (and little effect on teacher performance and probably zero effect on student behaviors). Put simply, the analyst needs to think about costs in conjunction with program implementation. Educational interventions can be implemented in various ways—both by design and inadvertently—and so the resources required for the intervention will vary accordingly.

In this chapter, we describe the key concept that economists use to think about costs—the idea of opportunity cost. We then define cost terms that apply to educational interventions and describe the components of a cost estimate. As a final contribution, we make an important distinction between cost information and budgetary data, emphasizing that budgets do not accurately represent costs.

A critical aspect of assessing costs is the correct use of the terminology of economic evaluation. When terms are used loosely, it is very difficult to explain and interpret costs. Thus, this chapter focuses on defining and clarifying terms. This discussion will provide a foundation upon which to design and apply the ingredients method as described throughout the remaining chapters of the book.