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Justifying Regulations: Examining the Benefit Side of the Equation
Originally published in William & Mary Policy Review
This paper evaluates the efficacy of agencies' cost benefit analysis. To assess a policy's given benefits, the paper describes multiple indices for performance, using case studies that trace regulatory policy across various branches and levels of the federal government. In assessing these policies to determine whether agencies realize the benefits they claim for regulations, the author looks to determine whether the regulation addresses a systemic problem in a market or government, then seeks to determine if the regulation explains how it will solve the problem it is intended to resolve. Through this process, this paper documents the validity of the claims federal agencies make with respect to the benefis of their regulatory actions, and illuminates several shortcomings in traditional regulatory analysis practices, focusing on both monetary and nonmonetary factors.
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.