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On the Accuracy of Regulatory Cost Estimates

  • Morgenstern, Richard

    ()

    (Resources for the Future)

  • Harrington, Winston

    ()

    (Resources for the Future)

  • Nelson, Per-Kristian

    ()

    (Resources for the Future)

This study compares ex ante estimates of the direct costs of individual regulations to ex post assessments of the same regulations. A review of more than two dozen environmental and occupational safety regulations indicates that ex ante estimates of total (direct) costs have tended to exceed actuals. The authors find this to be true of 12 of the 25 rules in their data set, while for only 6 were the ex ante estimates too low. The overestimation of total costs is often due to errors in the quantity of emission reductions achieved by the rule which, in turn, suggest that the rule's benefits may also be overestimated. The quantity errors are driven by both baseline and compliance issues. At least for EPA and OSHA rules, overestimation of per-unit abatement costs occurs about as often as underestimation. In contrast, for those rules that use economic incentives, per-unit costs are consistently overestimated. Much of the overestimation can be attributed to technical innovations unanticipated at the time the rule is issued, and to quantity errors. In addition, several methodological and procedural explanations also apply: changes in the regulation after the cost estimate is prepared, use of maximum cost estimates, and asymmetric error correction. Since a number of environmental laws encourage the development of cost estimates that reflect a maximum rather than a mean, regulatory agencies could issue a "best estimate" along with the statutorily preferred cost estimate. Likewise, they could ensure that rule changes made in the course of the regulatory development process are manifest in revised cost estimates. Indeed, discovering how and when to adjust ex ante estimates provides the strongest possible justification for more credible ex post studies�a research activity that merits greater emphasis.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-99-18.

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Date of creation: 01 Jan 1999
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Handle: RePEc:rff:dpaper:dp-99-18
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  1. Hau, Timothy D., 1992. "Congestion charging mechanisms for roads : an evaluation of current practice," Policy Research Working Paper Series 1071, The World Bank.
  2. Dale W. Jorgenson & Peter J. Wilcoxen, 1990. "Environmental Regulation and U.S. Economic Growth," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 314-340, Summer.
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  4. Maloney, Michael T & McCormick, Robert E, 1982. "A Positive Theory of Environmental Quality Regulation," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 99-123, April.
  5. Richard D. Morgenstern & William A. Pizer & Jhih-Shyang Shih, 2001. "The Cost Of Environmental Protection," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 732-738, November.
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  9. Garber, Steven & Hammitt, James K., 1998. "Risk Premiums for Environmental Liability: Does Superfund Increase the Cost of Capital?," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 267-294, November.
  10. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
  11. Salop, Steven C & Scheffman, David T, 1983. "Raising Rivals' Costs," American Economic Review, American Economic Association, vol. 73(2), pages 267-71, May.
  12. Kwerel, Evan, 1977. "To Tell the Truth: Imperfect Information and Optimal Pollution Control," Review of Economic Studies, Wiley Blackwell, vol. 44(3), pages 595-601, October.
  13. Weitzman, Martin L, 1980. "Efficient Incentive Contracts," The Quarterly Journal of Economics, MIT Press, vol. 94(4), pages 719-30, June.
  14. Karen Palmer & Wallace E. Oates & Paul R. Portney, 1995. "Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm?," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 119-132, Fall.
  15. Hazilla, Michael & Kopp, Raymond J, 1990. "Social Cost of Environmental Quality Regulations: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 853-73, August.
  16. Adam B. Jaffe et al., 1995. "Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 132-163, March.
  17. James Hammitt, 2000. "Are The Costs of Proposed Environmental Regulations Overestimated? Evidence from the CFC Phaseout," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 16(3), pages 281-302, July.
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