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…”