March 1, 2013

Justifying Regulations: Examining the Benefit Side of the Equation

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Many debates over regulation focus mainly on costs. Critics argue that, among other things, the weight of regulations depresses economic activity,1 reduces productivity,2 and discourages new businesses formation.3 Additionally, regulations confer special privileges on incumbents4 and disproportionately impact smaller businesses.5 This results in diminished prosperity and foregone opportunities for the public. Numerous attempts to quantify the regulatory burden have resulted in estimates ranging from tens of billions6 to well over a trillion dollars.7

In contrast, advocates of regulation claim that many regulatory burden estimates exaggerate the costs.8 More importantly, they point out that critics of regulation focus exclusively on the costs and do not account for the benefits of regulation.9 These benefits can be substantial. For example, the Environmental Protection Agency (EPA) estimated that Clean Air Act regulations generated $22 trillion in net benefits during the period from 1970 to 1990.10 The Office of Management and Budget (OMB) aggregated various agencies’ benefit estimates and found that the total benefits of major regulations issued between 2001–2011 ranged between $141 billion and $700 billion,11 while aggregate costs within the same period ranged between $43 billion and $67 billion.12 While conceding to criticism that regulations may be costly, advocates claim that its benefits justify the costs. 

The OMB report, however, has major limitations. It only includes regulations with monetized cost and benefit estimates. Since only a fraction of regulations are analyzed with monetized costs and benefits,13 the OMB report leaves out the majority of significant regulations. In addition, cost and benefit are difficult to estimate, and different analysts can arrive at different results when studying the same policy depending on their modeling. 

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