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Designing Smarter Regulation with Improved Benefit-Cost Analysis

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  • Hahn Robert

    (University of Manchester)

Abstract

Benefit-cost analysis is required for many regulatory decisions in the United States and in other countries. In this paper, I examine a standard textbook model that is used in benefit-cost analysis as it is actually applied to environmental policy and other areas of regulation. My primary objective is to suggest how including some key factors in the analysis could promote the development of smarter regulation.I begin by presenting a standard economic model for government intervention in markets, which balances benefits and a narrow definition of costs. I then introduce a richer normative theory that considers several political and economic costs that are frequently not considered in analyzing real-world applications. Examples include costs associated with rent seeking, design and implementation, and raising revenues. The richer theory suggests that the government should supply less of a good, or ask the private sector to provide less of that good, than the standard economic model suggests. The reason is that intervening in markets is often more costly than the standard model assumes. In special cases, the theory provides guidance on the setting of socially optimal taxes and subsidies. I then explore how the theory needs to be modified in the presence of biased estimates of benefits and costs. I conclude with a discussion of how the theoretical framework can be applied to the actual design of regulatory policy.

Suggested Citation

  • Hahn Robert, 2010. "Designing Smarter Regulation with Improved Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, De Gruyter, vol. 1(1), pages 1-19, July.
  • Handle: RePEc:bpj:jbcacn:v:1:y:2010:i:1:n:5
    DOI: 10.2202/2152-2812.1000
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    References listed on IDEAS

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    Cited by:

    1. Kinnaman, Thomas C., 2011. "The economic impact of shale gas extraction: A review of existing studies," Ecological Economics, Elsevier, vol. 70(7), pages 1243-1249, May.
    2. Marette Stéphan & Roosen Jutta & Blanchemanche Sandrine, 2011. "The Combination of Lab and Field Experiments for Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, De Gruyter, vol. 2(3), pages 1-36, August.
    3. Graves, Philip E., 2012. "Benefit-Cost Analysis of Environmental Projects: A Plethora of Biases Understating Net Benefits," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 3(3), pages 1-25, August.
    4. Philip E. Graves, 2010. "Benefit-Cost Analysis of Environmental Projects: A Plethora of Systematic Biases," CESifo Working Paper Series 3144, CESifo.

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