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Benefit-Cost Analysis in Environmental, Health, and Safety Regulation: A Statement of Principles

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Author Info

  • Arrow, Kenneth J.
  • Cropper, Maureen L.
  • Eads, George C.
  • Hahn, Robert W.
  • Lave, Lester B.
  • Noll, Roger G.
  • Portney, Paul R.
  • Russell, Milton
  • Schmalensee, Richard L.
  • Smith, V. Kerry
  • Stavins, Robert N.

Abstract

Benefit-cost analysis can play a very important role in legislative and regulatory policy debates on improving the environment, health, and safety. It can help illustrate the tradeoffs that are inherent in public policymaking as well as make those tradeoffs more transparent. It can also help agencies set regulatory priorities. Benefit-cost analysis should be used to help decisionmakers reach a decision. Contrary to the views of some, benefit-cost analysis is neither necessary nor sufficient for designing sensible public policy. If properly done, it can be very helpful to agencies in the decisionmaking process. Decisionmakers should not be precluded from considering the economic benefits and costs of different policies in the development of regulations. Laws that prohibit costs or other factors from being considered in administrative decisionmaking are inimical to good public policy. Currently, several of the most important regulatory statutes have been interpreted to imply such prohibitions. Benefit-cost analysis should be required for all major regulatory decisions, but agency heads should not be bound by a strict benefit-cost test. Instead, they should be required to consider available benefit-cost analyses and to justify the reasons for their decision in the event that the expected costs of a regulation far exceed the expected benefits. Agencies should be encouraged to use economic analysis to help set regulatory priorities. Economic analyses prepared in support of particularly important decisions should be subjected to peer review both inside and outside government. Benefits and costs of proposed major regulations should be quantified wherever possible. Best estimates should be presented along with a description of the uncertainties. Not all benefits or costs can be easily quantified, much less translated into dollar terms. Nevertheless, even qualitative descriptions of the pros and cons associated with a contemplated action can be helpful. Care should be taken to ensure that quantitative factors do not dominate important qualitative factors in decisionmaking. The Office of Management and Budget, or some other coordinating agency, should establish guidelines that agencies should follow in conducting benefit-cost analyses. Those guidelines should specify default values for the discount rate and certain types of benefits and costs, such as the value of a small reduction in mortality risk. In addition, agencies should present their results using a standard format, which summarizes the key results and highlights major uncertainties.

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Bibliographic Info

Paper provided by Regulation2point0 in its series Working paper with number 615.

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Date of creation: Jan 1996
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Handle: RePEc:reg:wpaper:615

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Web page: http://regulation2point0.org/

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Citations

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Cited by:
  1. David Dole, 2001. "Measuring the Impact of Regulations on Small Firms," NCEE Working Paper Series 200103, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Nov 2001.
  2. Hahn, Robert W. & Litan, Robert E., 2002. "An Analysis of the Fifth Government Report on the Costs and Benefits of Federal Regulation," Working paper 411, Regulation2point0.
  3. Konishi, Yoshifumi & Adachi, Kenji, 2011. "A framework for estimating willingness-to-pay to avoid endogenous environmental risks," Resource and Energy Economics, Elsevier, vol. 33(1), pages 130-154, January.
  4. Lee, Norman, 2002. "Developing and Applying Regulatory Impact Assessment Methodologies in Low and Middle Income Countries," Centre on Regulation and Competition (CRC) Working papers 30691, University of Manchester, Institute for Development Policy and Management (IDPM).
  5. Hahn, Robert W. & Litan, Robert E., 2001. "An Analysis of the Fourth Government Report on the Costs and Benefits of Federal Regulations," Working paper 409, Regulation2point0.
  6. Hahn, Robert W., 1999. "An Assessment of OMB's Draft Guidelines to Help Agencies Estimate the Benefits and Costs of Federal Regulation," Working paper 418, Regulation2point0.
  7. Hahn, Robert W., 1998. "The Economics & Politics of Climate Change," Working paper 610, Regulation2point0.
  8. Hahn, Robert W. & Litan, Robert E., 2003. "An Analysis of the Sixth Government Report on the Costs and Benefits of Federal Regulations," Working paper 153, Regulation2point0.
  9. Hahn, Robert W. & Litan, Robert E., 2000. "An Analysis of the Third Government Report on the Benefits and Costs of Federal Regulations," Working paper 403, Regulation2point0.
  10. Hahn, Robert W. & Litan, Robert E., 2007. "An Analysis of the Tenth Government Report on the Costs and Benefits of Federal Regulations," Working paper 67, Regulation2point0.
  11. Hallegatte, Stephane & Shah, Ankur & Lempert, Robert & Brown, Casey & Gill, Stuart, 2012. "Investment decision making under deep uncertainty -- application to climate change," Policy Research Working Paper Series 6193, The World Bank.
  12. Hahn, Robert W. & Litan, Robert E., 1998. "An Analysis of the Second Government Draft Report on the Costs and Benefits of Federal Regulations," Working paper 413, Regulation2point0.
  13. Hahn, Robert W., 1998. "The Economics and Politics of Climate Change," Working paper 60, Regulation2point0.
  14. Hahn, Robert W., 2000. "The Impact of Economics on Environmental Policy," Journal of Environmental Economics and Management, Elsevier, vol. 39(3), pages 375-399, May.
  15. Kniesner, Thomas J. & Viscusi, W. Kip, 2002. "Cost-Benefit Analysis: Why Relative Economic Position Does Not Matter," Working paper 521, Regulation2point0.
  16. Junn-Yuan Teng & Wen-Chih Huang & Maw-Cherng Lin, 2010. "Systematic budget allocation for transportation construction projects: a case in Taiwan," Transportation, Springer, vol. 37(2), pages 331-361, March.
  17. Hahn, Robert W., 1998. "How Changes in the Federal Register Can Help Improve Regulatory Accountability," Working paper 166, Regulation2point0.
  18. Hahn, Robert W., 1999. "Regulatory Reform: Assessing the Government's Numbers," Working paper 268, Regulation2point0.
  19. Hahn, Robert W., 2008. "An Analysis of the 2008 Government Report On the Costs and Benefits of Federal Regulations," Working paper 267, Regulation2point0.

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