Saturday, April 6, 2013

The Benefits and Costs of Cost Benefit Analysis

Grist has a fascinating interview with legal scholar Lisa Heinzerling about the regulatory bureaucracy of EPA decisionmaking, especially regarding the use of cost-benefit analysis (CBA). Basically there's a lot of opacity and possible unconstitutional implementation of environmental policy statutes because OIRA (The Office of Information and Regulatory Affairs) likes using CBA to vet new regulations, but EPA and Congress don't always want that. The President, who controls OIRA more directly than he does the EPA, favors CBA. The tangle of formal and informal decisionmaking power creates confusion about who's really in charge.

Using CBA to determine which regulations should be implemented or scrapped seems like total common-sense: if the benefits of a regulation outweigh its costs, it gets a green light. Simple. And alternatives to CBA sometimes result in regulations with unintended consequences: mandating that industries use specific technologies can disincentivize research into solving pollution problems; standards set by political deliberation sometimes work to protect the interests of influential industry groups rather than people; politicians seeking popularity may compete by passing laws that are needlessly costly or based on intuitive toxicology and not science.

CBA has various practical difficulties (measuring the value of a life, comparing the present to the future, etc.), but the main downside is that it's biased in favor of maintaining the current policy status quo. For one it's costly to perform the analysis itself, increasing institutional friction. More fundamentally, however, the costs imposed by a new regulation on existing activity are easily-measured and well-understood. The benefits, conversely, tend to be harder to measure because they're almost by definition predictions about the future. Drawing a direct line of causation from sources of pollution or environmental harms to specific populations is extremely difficult. This asymmetric uncertainty probably results in a systematic understating of the benefits of environmental regulation.

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