Cost-Benefit & Risk Analysis in Public Policy

Why these methodologies?

• The benefits of public policies & programs come at a price: imposed costs – Public costs

• Tax dollars • Government personnel

– Private costs • Economic costs • Constraints on rights

• How do we know when the benefits are worth the costs? – In a world of finite public and private resources, we ne

ed a standard for evaluating tradeoffs, setting priorities, and making choices.

Application in Public Policy

• Setting a common standard for determining if a policy/program is worth implementing

• Setting a common standard for choosing among policies/programs that compete for public resources

• Neither are objective/scientific standards for decision-making

Cost-Benefit Analysis

How should government decide which policy are worthwhile?

Cost-Benefit Analysis

• Societal Goal ≡ Economic Efficiency – Getting the most “output” for the least “input” – Maximizes overall social welfare

• Method – Monetizing all significant costs & benefits – Probability Discounting for Uncertainty of Outc

omes – Discounting for Time-value of money

Executive Order 12291

• February 1981 --Reagan

• Regulatory Impact Analyses – Cost-Benefit Analysis required – Submitted by all agencies – Reviewed by Office of Information & Regulato

ry Affairs • OMB office in White House

Executive Order 12291

• Potential benefits to society must outweigh potential costs

• Regulatory objectives must maximize net benefits to society

• Regulations must impose least net costs to society in achieving objectives

• Regulatory priorities must maximize aggregate net benefits to society taking into account – The state of the economy – The state of particular industries

CBA -Advantages

• Comparability

• Transparency

• Ignorance Revelation

CBA -Limitations

• Economic valuation of public goods highly uncertain – Not traded in markets

• Non-material values difficult to monetize – Existence values – Nuisance values – Aesthetic values – Cultural values – Historical values

CBA -Limitations

• Standing (stakeholders) – Whose benefits and costs do we count?

• Among existing interests • Future generations • “non-human” stakeholders?

• Failure to consider distributional effects – Equity (Caldor-Hicks criterion) – Those receiving benefits and those burdened

with costs may not be the same

CBA -Limitations

• Societal Welfare ≠Σ Individual Welfare – What we want individually may not be what w

e want collectively

– What about intensity of preferences?

• Unstable Societal/Individual Preferences • Policy Outcomes are Uncertain

– Sensitivity to characterization of probabilities

• Future Values need discounting – sensitivity to choice of rates

Risk Analysis

Executive Order 12866

• 1993 --Clinton • All regulatory agencies shall • “…consider, to the extent reasonable, the degre

e and nature of risks posed by various substances or activities within its jurisdiction”

• Explain how any proposed regulatory action will reduce those risks

Risk Analysis

• Risk-Cost Analysis – EPA Arsenic Rule – EPA Diesel Rule

• Risk-Risk (Tradeoff) Analysis – DDT vs. Malaria – Chlorinated Water vs. Contamination – Vaccination vs. Disease

Risk Assessment & Analysis

• Objective (Scientific) Dimension – Risk characterization

• Subjective (Value-based) Dimension – What to do?

• Uncertain Risks • Long-term v. short-term risks • Distributional (environmental justice) risks • Costly Risk reduction programs

Defining Characteristics of Risk

• The probability of an adverse outcome

• Type & severity of adverse outcome

• The size of the exposed population

• Certainty of risk estimates

• Timing of adverse outcomes

• Distribution of adverse outcomes

Scientific Dimension of Risk Assessment

• Hazard Identification – Could this substance pose a health threat & if so, wha

t kind? • Dose-Response Analysis

– How does the degree of exposure to the substance related to the degree of toxic effect?

• Exposure Assessment – What are the characteristics of public exposure to this

substance? • Risk Characterization

– Combining dose-response and exposure data, how is public health affected?

Subjective Dimension of Risk Assessment

• How “bad” is bad? – Precautionary Principle: Assume toxicity until

proven safe. • If in doubt, then regulate.

– Free Market Principle: Assume it is safe until a hazard is identified.

• If in doubt, do not regulate.

• What is “Sound” Science? – How much science do we need to make the “ri

ght” decision?

Issues

• Since no risk can be reduced to zero, who decides how “bad” is bad?

• Who sets risk priorities? – Experts – Public

“Chemicals in the Environment Pose and Increasing Risk to Society”

“Animal Models are a Valid Method for Assessing Risk”

“Decisions about citing a HWF should be made primarily based on neighbors’ c

oncerns, not risk numbers…”