Defending Cost-Benefit Analysis of Regulation
AEI Newsletter

Should cost-benefit analysis be used to evaluate the effectiveness of regulation, and how effective are the current methods of economic analysis? Resident scholar Robert W. Hahn, director of the AEI-Brookings Joint Center for Regulatory Studies, considers these questions in his new book In Defense of the Economic Analysis of Regulation, which also examines how governments could spend regulatory dollars more efficiently.

Supporters and critics alike agree that placing monetary values on the costs and benefits of regulation is difficult. Some scholars use scorecards to summarize the impact of different regulations based on a number of indicators such as costs, benefits, cost savings, lives or life-years saved, and net benefits; but this method has also been criticized as flawed.

Measuring cost-effectiveness can, however, positively impact important life-saving regulation. As Hahn notes, it matters whether government mandates reductions in “radiation exposure from X-ray equipment ($23,000 per life saved) or radiation emission controls at nuclear facilities ($34 billion per life-year saved), or whether it imposes a mandatory seat belt law ($69 per life-year saved) versus requiring airbag installation in cars ($120,000 per life-year saved).” Since many life-saving investments are expensive and resources are limited, policymakers must prioritize, and economic analysis is an important component in enabling them to do so.

While Hahn cites economic studies performed by numerous scholars, his own studies, based on government numbers, conclude that a substantial number of regulations fail to pass a cost-benefit test. He argues that economic analysis in general and scorecard usage in particular have shown a substantial variation in the cost-effectiveness of government regulations and demonstrated that it is possible to gain more for less, particularly in terms of environmental quality and life-saving investments.

Nevertheless, Hahn notes that critics and proponents of economic analysis can agree on balancing quantitative and qualitative information, providing better treatment of uncertainty and resources to investigate effects of regulation, and creating new institutional approaches to improve regulation.

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