Benefit-cost Analysis In Environmental, Health, And Safety Regulation

Benefit-Cost Analysis in Environmental, Health, and Safety Regulation A Statement of Principles Kenneth J. Arrow, Maureen L. Cropper, George C. Eads, Robert W. Hahn, Lester B. Lave, Roger G. Noll, Paul R. Portney, Milton Russell, Richard Schmalensee, V. Kerry Smith, and Robert N. Stavins American Enterprise Institute, The Annapolis Center, and Resources for the Future 1996 This work was jointly sponsored by the American Enterprise Institute, the Annapolis Center, and Resources for the Future. Funding was provided by the Annapolis Center. We would like to thank Elizabeth Drembus and Jonathan Sisken for their editorial assistance and Richard Seibert, Meaghan Hayward, and Mary Moran for their administrative support. The views in this document represent those of the authors and do not necessarily represent the views of the institutions with which they are affiliated. Available from the AEI Press, c/o Publisher Resources Inc., 1224 Heil Quaker Blvd., P.O. Box 7001, La Vergne, TN 37086-7001. Phone: (800) 269-6267. Fax: (800) PRI-ORDER. Distributed outside the United States by arrangement with Eurospan, 3 Henrietta Street, London WC2E 8LU, England. ISBN 0-8447-7066-3 3 5 7 9 10 8 6 4 2 © 1996 by the American Enterprise Institute for Public Policy Research, Washington, D.C. All rights reserved. No part of this publication may be used or reproduced in any manner whatsoever without permission in writing from the American Enterprise Institute except in the case of brief quotations embodied in news articles, critical articles, or reviews. The views expressed in the publications of the American Enterprise Institute are those of the authors and do not necessarily reflect the views of the staff, advisory panels, or trustees of AEI. Printed in the United States of America Contents PREFACE v EXECUTIVE SUMMARY 1 PRINCIPLES 3 Part One: Guidance for Decisionmakers on Using Economic Analysis to Evaluate Proposed Policies 3 Part Two: Suggestions for Improving the Quality of Economic Analysis Used in Regulatory Decisionmaking 6 ABOUT THE AUTHORS 13 iii Preface The direct costs of federal environmental, health, and safety regulations are probably on the order of $200 billion annually, or about the size of all federal domestic, nondefense discretionary spending. The benefits of those regulations are even less certain. Evidence suggests that some recent regulations would pass a benefit-cost test while others would not. The growing impact of regulations on the economy has led both Congress and the administration to search for new ways of reforming regulation. Many of those regulatory reform initiatives call for greater reliance on the use of economic analysis in the development and evaluation of regulations. Because ideological extremes have dominated debate on this topic, a dispassionate commentary may be particularly valuable. On September 29, 1995, a group of leading economists met to discuss the role of economic analysis in the development of environmental, health, and safety regulation. The meeting was sponsored jointly by the American Enterprise Institute, the Annapolis Center, and Resources v vi PREFACE for the Future and was cochaired by Robert W. Hahn and Paul R. Portney. We would like to thank Harrison H. Schmitt, chairman of the Annapolis Center, for providing us with the resources necessary to undertake this endeavor. The following economists participated in the meeting: Kenneth J. Arrow, Stanford University Maureen L. Cropper, World Bank George C. Eads, Charles River Associates, Inc. Robert W. Hahn, American Enterprise Institute Lester B. Lave,