Designing Smarter Regulation with Improved Benefit-Cost Analysis

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.

The Combination of Lab and Field Experiments for Benefit-Cost Analysis

“…Both limits and distortions coming from instruments are directly taken into account in the welfare maximization. This differs from classical BCA where distortions linked to different regulatory instruments are not always precisely characterized (see Hahn and Tetlock (2008) and Hahn (2010) for new insights regarding the distortions that should be taken into account). This strengthens the role of BCA by focusing on the question "how to intervene?"…”

The economic impact of shale gas extraction: A review of existing studies

“…The question most economists and long-term oriented politicians is whether the overall benefits of extracting the gas exceed the costs (Hahn, 2010). Unfortunately neither of these two reports addresses this question.…”

The Evaluation of Regulatory Agencies

“…evaluations, particularly ones by their staff. This seems to be a major reason why policy observers and academics, journalists and others are so uniformly critical: (a) of the quality and apparent lack of impact of the ex ante regulatory appraisals emerging from government departments/ministries (and the EU); (b) regularly point to the absence of thorough-going ex post evaluations by them (Hahn, 2008); and c) of the limited relationship between the quality of evaluation exercises and the quality of regulation per se.…”