The Coordination Value of Regulation

The current method used by the US Government to calculate benefits and costs does not accurately measure the monetary value of some regulations. The problem is that the method fails to recognize the possibility that individual valuations, reflecting judgments in a relatively isolated, uncoordinated situation, might be significantly different from individual valuations in a situation of coordination. For example, people might be willing to pay $X for a good, supposing that other people have that good, but might be willing to pay $Y to abolish that good, supposing that no one will have that good. Or people might be willing to pay $X to protect members of an endangered species in their individual capacity, but far more than $X for the same purpose, assuming that many others are paying as well; one reason may be that an individual expenditure seems futile. We sketch, identify, and explain this unmeasured value, which we define as coordination value, meant as an umbrella concept to cover several categories of cases in which individual valuation measured in the uncoordinated state might be inadequate. Changing the methodology of benefit–cost analysis to consider coordination value would present serious empirical challenges, but would eliminate the estimation error.