Weighing the Benefits of Regulation

-- By EliKeene - 4 May 2015

Cost-benefit analysis (CBA) has been the cornerstone of environmental regulatory decision-making since 1981, when President Reagan ordered federal agencies to adopt regulatory impact assessments. While weighing monetary costs and payoffs has become an appealing weapon in the arsenals of both regulators and the regulated, it is also strikingly inadequate in its objectivity and scope. If federal agencies are to develop effective and progressive regulations to meet growing environmental challenges, they should seek to lessen the role of monetary costs in their analyses and reframe regulation as a device for enhancing social welfare.

The Need for Efficient Regulation

The theory behind regulatory CBA is simple: when the monetary cost of implementing a regulation exceeds the value of preventing a harm, that regulation’s utility to society decreases. While agencies are accorded some degree of deference on how costly is too costly, the act of weighing costs itself is thought to be essential for two primary reasons.

First, cost weighing is thought to provide a quantitative, rational foundation on which agencies can base their decisions. By this logic, without an understanding of what is to be expended and what is to be gained, a regulation is merely an arbitrary stab in the dark at preventing a harm of unknown magnitude.

Second, cost-benefit analyses are perceived to put a check on the diminishing returns of regulation. To some extent, even those who have challenged the indispensability of CBA recognize this, admitting that it would “make no sense to require [power] plants to spend billions to save one more fish or plankton.” Weighing costs, in this sense, allows agencies to determine the optimal amount of regulation.

Although these arguments in favor of cost-benefit analysis address real concerns about regulatory efficiency, they fail to address the shortcomings of CBA itself.

The Inherent Subjectivity of CBA

The most glaring shortcoming of CBA is that it can only accurately measure one side of the equation. While the cost to industry of adopting an extant technology are usually clear, the benefits often elude monetization.

Why do you say this? Industry or other party cost estimates are just as uncertain, assumption-dependent, rhetorically exaggerated, as any other content of the regulatory process.

In conducting cost-benefit analyses, agencies must affix dollar amounts to qualitative aspects of life. Commonly factored into the “benefits” side of the equation are offsets to healthcare costs, missed work, and premature death, which is itself the product of a number of factors such as lost wages and the price workers attach to assuming increased risk of mortality.

The result of such monetization is not the “objective basis” that CBA seeks to provide. Instead, it is a subjective measure resulting from arbitrary values attached to human life. These values vary depending on who is running the numbers. For example, in the DC Circuit’s hearing of White Stallion Energy v. EPA, the court grappled with two dramatically different “benefits” estimates for proposed emissions standards. While petitioners claimed the standards would produce benefits of $4-6 million a year, the EPA cited a benefit range of $37 to $90 billion in health benefits alone.

The staggering range of estimated benefits represents not merely a disagreement about impact, but a fundamentally different understanding of what should be measured. In these situations, where the dispute concerns what the benefits actually are, weighing the value of those benefits merely begs the question.

What CBA Cannot Measure

CBA, however, is not just arbitrary; it is detrimental to regulatory goals.

The need to monetize every output means that benefits that are unmonetizable, even by subjective estimation, fall out of consideration.

No, they receive some form of approximation that you would consider insufficient. But this is about quantification, rather than monetization. You are objecting to social processes that attempt to compare things by making them comparable through quantifying approximation. For some purposes, such an objection has bite. But here you are at fault in claiming that your objection is about money, when really it is about applying quantities to qualitative material.

Most important among these are regulation’s effects on social psychology. What, for example, is the monetary value of a generation growing up with the expectation that tap water will be potable? Such effects on collective psychology can induce sweeping changes in political engagement, public morality, and social cohesion. But while increased civic activity is undeniably a social benefit, it is not a benefit with a dollar value.

These factors may, of course, be weighed separately, but this raises another question: are these benefits somehow less valuable than monetary benefits? And if they are not “second-class benefits,” how can an agency possibly conduct a CBA without them?

CBA also fails to take into account questions of social equity. Many objects of environmental regulation present threats specifically to poor and disenfranchised communities. Failure to properly regulate these activities, therefore, has an inordinate negative impact on vulnerable communities.

The current centrality of CBA, however, wrongly equates the cost to these communities with cost to industry. Even where costs to industry drastically outweigh benefits to the community, the industry may be able to bear those costs, whereas the community may not be able to forgo the benefit. By justifying regulations with monetary costs and benefits, agencies invite challengers to attack the financial burden with their own calculations while dodging the regulation’s implications for social equity.

Adjusting the Equation

Despite its shortcomings, doing away with cost weighing in regulatory decision-making altogether would be neither ideal nor practicable. CBA should continue to play a role in helping government agencies produce effective regulations, but only after it is repositioned and reformulated.

Fixing the role CBA will play in regulatory decision-making means allowing it to cede ground to broader considerations of long-term goals and social equity. Recognizing that so much of the “benefits” side of the equation is economic fiction, agencies should be free to ask simpler questions. Questions like “can industry reasonably bear this cost?” and “will this regulation produce substantial social benefit?” provide agencies with a rational basis upon which to formulate regulations, without resorting to fruitless attempts to monetize the benefits of implementation.

Further, agencies should refocus support for their regulations on community impact. Emphasizing that regulations are often a tool to promote social welfare will help to reframe the issue and weaken challenges from industry that rely primarily on complaints of financial burden.

CBA is attractive in its promise of an optimal level of regulation. But in an era of growing environmental challenges, CBA is too weak a tool. Only by elevating the importance of social and qualitative considerations can government agencies ensure that regulations meet society’s needs.

This properly focuses the draft improving substantially over the last version I read. But you are still locked too closely to the idea that cost-benefit analysis is a particular process. It's a rhetoric for organizing social disputing about policy choices, like law is, or political drama in the cult-of-personality mode, or conspiracy theories. Whether it should be in use or not depends not on whether you win or lose particular disputes conducted within its frame, or within the frame enclosing it. Whether we are invested for or against particular rhetorics, and why---I would suggest, having learned how to suggest it from Thurman Arnold in a form that I think did not much appeal to you---is more a matter of unconscious than of conscious cogitation. If you will focus a moment on your own attitudes about this particular rhetoric, and where they come from, you might gain an insight whose consequences would surprise you.