September 30, 1999

Economic Benefit Component of Civil Penalties

  • Susan Dudley

    Director, George Washington University Regulatory Studies Center
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Calculation of the Economic Benefit of Noncompliance in EPA's Civil Penalty Enforcement Cases: Notice

Stated Purpose:

The economic benefit component is designed to meet EPA's civil penalty policy goal of "recovery -- at a minimum -- of the economic benefit derived from noncompliance."

Summary of RSP Comment:

EPA's civil penalty policy requires that penalties capture the economic gain a violator derives from noncompliance. An approach that based penalties on the social cost of a violation, rather than the private gain, as envisioned in the law and economics literature, would be more likely to induce the optimal level of deterrence. The economic benefit approach can encourage precautionary measures that are not in the public interest.

Though EPA's policy of capturing economic gains embodies serious flaws from a social welfare perspective, its economic benefit model does have the advantage of being objective and easy to apply. This notice proposes several changes that will result in improvements to the economic benefit model. The model could be further improved by using a risk-free rate to bring all cash flows to the penalty payment date on the recognition that the cash flows in question do not exhibit systematic risks (which would command a higher rate of return).

The notice also proposes to develop guidance to expand its approach to estimating private economic benefit to include "illegal competitive advantage." We caution that some of the scenarios EPA presents under this heading reflect benefits that are already captured by EPA's existing model. Further, they do not really reflect "competitive advantage" in the standard use of that term because they do not depend on, or necessarily affect, competition. We encourage EPA to use a different term for these types of benefits and to limit consideration of them to ex ante rather than ex post private gains, as it does in the avoided cost methodology.