Cost-benefit Analysis

Regulatory Impact Assessment

RIAs are cost-benefit analyses that look to forecast the overall impact of new regulatory initiatives. They are intended to inform decision-making, not to determine decisions or to substitute for political accountability. They are intended to encourage better regulation by clarifying regulatory objectives and definitions of problems and ensuring that regulatory objectives are achieved effectively and at the lowest cost by the strategy that maximizes benefits over costs – regulatory or non-regulatory. They should identify both alternative options for achieving desire objectives and the informational needs of policy makers. They should open up assumptions about compliance effects and real world (including business) impacts and facilitate ministerial and parliamentary scrutiny. Finally, RIAs should increase regulatory accountability and transparency, while promoting proportionality and targeting.

If carried out astutely RIAs should enhance regulatory policy-making. However, effective execution involves many technical and other difficulties, notably concerning the availability of good data, the assumption be made on values underpinning the assessment, the consistency of RIAs with statutory social objectives, the timing of the assessment, and administrative resistance to the assessment process. Examination of RIA processes have emphasized the seriousness of these and other implementation problems, as well as the difficulties that those carrying out RIAs have encountered in delivering high quality assessment.

Baldwin, Robert , "Is better regulation smarter regulation," Public Law, Autumn 2005, 485-511

The author outlines the development of the better regulation movement within government, describes the regulatory enforcement tools that governments have deployed in furthering that movement, and then considers the capacity of the ‘better regulation’ approach to deliver smarter regulation – regimes that offer the best mixtures of regulatory instruments and institutions. He argues that there are a number of identifiable reasons – practical and theoretical – why the better regulation movement may not readily result in ‘smarter’ regulatory policies and regimes.

Sunrise provisions

A sunrise clause puts a specific time-frame limit on the life of a regulation. This prevents excess burden and juridification. It requires rolling reviews and weeds out antiquated measures. Such provisions are, however, expensive in terms of time management, and they can create uncertainty in regulatory systems that can both increase investment cost and prejudice consumer confidence in the durability of protections. Nevertheless, sunset provisions can have particular value in certain circumstances: where regulation is introduced at short notice in response to a crisis and without detailed analysis or on a precautionary basis and where further research will provide a firmer basis for decision-making. Also, it is useful where a sector, event, technology or market is changing rapidly and the rationale for regulating may fall away; the legislation is in the nature of a “pilot project”; or the regulation confers rights on the state (rather than on citizens).

Baldwin, Robert , "Is better regulation smarter regulation," Public Law, Autumn 2005, 485-511

The author outlines the development of the better regulation movement within government, describes the regulatory enforcement tools that governments have deployed in furthering that movement, and then considers the capacity of the ‘better regulation’ approach to deliver smarter regulation – regimes that offer the best mixtures of regulatory instruments and institutions. He argues that there are a number of identifiable reasons – practical and theoretical – why the better regulation movement may not readily result in ‘smarter’ regulatory policies and regimes.

Discounting

Discounting is used in cost-benefit analysis efforts to establish the relative value gained from, and therefore worth of, imposing specific regulations. Having gained ascendancy recently in the U.S., particularly through the Office of Information and Regulatory Affairs of the Office of Management and Budget, discounting is intended to extend the cost-benefit analysis into the future. Its first premise is that money today is worth more than money in the future, because money today can be invested, and thereby will have grown through interest or dividends by the time the designated future arrives. Alongside this premise is the conviction that people prefer benefits today than in the future, making future benefits less valuable.

There are a number of criticisms of discounting. First, to assess benefits and costs it’s necessary to assign a monetary value to benefits so that they can be discounted into the future. However, when the benefits of regulation include the preservation of human life and welfare, assigning such a value is highly controversial. Some claim it is not possible to assign such a value. Currently, $3-7 million is the going range, but critics ask how many parents would willingly accept that money to forfeit the life of their child.

Another complication with this approach is the assumption that the lives of our children or children’s children, lives in the future generally, are worth less than our own. Whether or not money is worth less in the future than now, can the same be said for human life – regardless of the perceived need to monetarize it?

Even if one grants the monetarization of human life, the amount assigned it, and the discounting of it into the future, the actual calculative process itself is the source of controversy, too. First, the assumption that the greater worth of money at a later time allows an analysis which concludes that a proposed regulation has a cost exceeding current benefits and therefore should be delayed until some more financially appropriate future time seems a bit whimsical. However, even if one improbably assumes the government putting funds in an interest generating savings account until it can better afford the regulation, there is no calculation for the loss of irreparable resources. If the ozone layer is destroyed, increased expenditures in the future may be too late. Also, calculations of benefits are, understandably limited to targeted benefits, but what about other residual benefits? Pollution regulation targeting cancer reduction is likely to have a far broader range of beneficial impacts, but these may not only be unconsidered, but unmeasurable.

Finally, with much regulation (e.g. environmental) the costs are usually present-heavy while the benefits are future-oriented. In such cases, whatever the rationale, discounting diminishes benefits in comparison to costs. Some critics see the vigilant insistence on such cost-benefit calculations as an ideological deregulatory instrument masquerading as an impartial economic calculation.

Corey, Jeffery C., "Discounting, EPA's Nonroad Spark-Engine Rule, and the hidden anti-regulatory agenda of cost-benefit analysis," UCLA Journal of Environmental Law and Policy, 22(1) 2003, 77-105

The author argues that the cost-benefit practice of discounting is not an impartial economic formula, but part of a deregulatory agenda, being advanced by the Office of Information and Regulatory Affairs in the U.S. OMB. He criticizes the practice of discounting on several fronts. For more on this topic, please see the discussion of discounting in the toolkit.

Steinzor, Rena I., "Pragmatic regulation in dangerous times," Yale Journal of Regulation, 20(2) summer 2003, 407-429

In the form of a book review, the author argues – in contrast to the “conservative,” “economist,” deregulationist dismissal of command and control as too costly – that U.S. lawmakers’ regulative approach of the 70s and 80s was consistent with the highest standards of the American pragmatist tradition. As such, she claims, that legislation has delivered the most efficient, effective, democratic regulation, respecting all competing perspectives, as was possible under the available deliberative process.

Revesz, Richard L. , "Environmental regulation, cost-benefit analysis, and the discounting of human lives", Columbia Law Review,99 1999