Introduction
From the efficiency perspective, pollution should be reduced until the additional costs of control just outweigh the additional benefitsCalculate all the costsCalculate all the benefits
This allows us to pinpoint the efficient level of pollution through benefit-cost analysis
Regulatory Impact Analyses
The EPA conducts formal benefit-cost analyses (known as regulatory impact analyses or RIAs) of any new regulation expected to cost more than $100 million For safety-based laws, EPA is supposed to
examine several different options that achieve a safety goal and choose the most efficient
A “Good” Benefit-Cost Study
A good benefit-cost study willFollow accepted proceduresProvide a clear statement of all assumptionsPoint out uncertainties where they existSuggest realistic margins of error
Doing Benefit-Cost 1:Lead Standards Under the Safe Drinking Water Act, the
EPA was required to establish “action standards” for lead in drinking water
Lead leaches from solder in older water systems
Estimating Costs Determine which of the 63,000 plus
systems nationwide would require remedial action, and at what level, to achieve the three different targets
Establish engineering cost estimates for the different steps
Study gives a plus or minus 50% range for uncertainty in its cost estimates
The Most Efficient Option
The net monetary benefits to society of the three options are:Option A: $62,685 millionOption B: $59,601 millionOption C: $20,670 million
The most efficient option then is option A because it maximizes the net monetary benefits to society
Benefit-Cost Ratio
The benefit-cost ratio is the value of the benefits of an option divided by its costsB/C ratio greater than one means total
benefits exceed total costsOptions A, B, and C all have B/C ratios greater
than 1Greatest B/C ratio is not the same as the most
efficient option…
The EPA’s Choice
Interestingly, the EPA did not choose Option A despite it being most efficient
In fact, the report never acknowledged that option A was the most efficient!!
Instead, the agency relied on the uncertainty in the benefit estimates and opted for the less expensive option B
Lessons
Due to substantial uncertainty, benefit-cost analysis cannot discriminate between “relatively close” options
Note: the B/C ratio has nothing to do with efficiencyThe B/C ratio for A was lower (11) than option
B (15.3)
Doing Benefit-Cost2 :Landfill Regulation
The EPA, under the Resource Conservation and Recovery Act (RCRA), was directed to draft regulations for the siting, construction and maintenance of municipal solid waste landfills
Two approachesPollute and cleanupPrevention
Cost Estimates EPA cost estimates, based on the
engineering approach, included expenses associated with:Land clearing, Excavation, Equipment, Labor,
Liner materials Both options required groundwater
monitoring wells Most added costs for the “pollute and
cleanup” option were for corrective action, while 50% of the added costs for the “prevent” option were for liners
Benefit Estimates
Two quantitative estimatesReduction in cancer risk
○ Estimated risk of cancer is 5.7 over the next 300 years
○ Both plans reduce this risk by 2.4 over the 300 year period: why?
Avoided cost of replacing damaged groundwater○ Cost of replacing with an alternative supply; this
probably overstates the benefits
No
Assuming that:All benefits are captured by mitigating the effects on
groundwater, andThe study’s complex modeling process generates
“precise” benefit and cost predictions Both plans are losers by an efficiency standard
Complying with existing water laws costs $2.5 billion more than supplying groundwater users with a new supply
Moving to a pollution prevention strategy makes matters even worse
Are there missing benefits from the prevention option?
Stricter standards may encourage more recycling and waste reduction. Are these benefits likely to be large?
Bottom-line: very few people depend on water that might be contaminated by municipal landfills. Benefits of regulation likely to be small.
Benefit-Cost Problems
These two examples illustrate “good” benefit-cost studies
There are lots of “bad” studies manufactured by “economists-for- hire”
But even honest analysts face pressures:
Political Influence In Benefit-Cost
1. Regulatory politics
2. Agenda control
3. Hard numbers problem
4. Paralysis by analysis
Regulatory Politics
EPA benefit-cost analysts may face pressure from their superiors at the Office of Management and Budget (OMB) to generate numbers in support of their preferred rule
Study may be put off until decisions have already been made
The Scientific Agenda
Big business has influenced the scientific agenda by funding conferences and targeting research in certain areas
Even academic scientists must often obtain research funding from industry
Hard Numbers Problem
Benefit-cost studies can provide a false sense of precision to decision makers“Hard” numbers are really “soft” when
uncertainty and incomplete benefit coverage are factored in
Decision makers don’t want uncertainty; they want an answer
Paralysis by Analysis
Paralysis by analysis:Opponents of government action can resort to
the legal system and exploit the uncertainty in the process to delay or block the implementation of regulations
Summary: Is Benefit-Cost Analysis Useful?
Two questions?Is it capable of identifying the efficient pollution
level? (this chapter)Is efficiency in pollution control the right
standard? (previous chapters)
Up to the Job? Yes While benefit-cost analysis cannot pinpoint
the efficient pollution level with the accuracy suggested by diagrams, it is helpful when uncertainty about benefits is low (landfill case?)
More generally, BCA:Provides a framework for a general “balancing”
of benefits against costsCan rank dissimilar proposals in terms of
efficiency
Up to the Job? No.
Benefit-cost’s fatal flaw is its inability to price the values of life, health, nature and the future.
Especially over the long run, choice of a discount rate can dramatically alter the conclusions of benefit-cost studies.