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To paraphrase Winston Churchill, benefit-cost analysis may be the worst tool for policymaking, except for all the others that have been tried.
If regulatory interventions in market transactions are to have any hope of achieving desired outcomes, they must be based on an understanding of the tradeoffs associated with alternative actions. Every president since Jimmy Carter has recognized this and required regulatory agencies to analyze the benefits and costs of proposed regulations before they are issued. Across developed countries, benefit-cost analysis (BCA) is the principal public policy tool for laying out available information in a way that allows policy makers to make balanced, efficient regulatory decisions in the face of limited resources. However, BCA has limitations. Despite numerous advances in the field, a number of significant problems have arisen that challenge its legitimate use in informing and evaluating public policy decisions.
The barriers to improving BCA are both institutional and technical. Among the institutional factors constraining the sound application of BCA in regulatory matters are that (1) legislation is often either silent on its use, or explicitly prohibits it; (2) BCA is conducted by regulatory agencies who use it to advocate for, rather than objectively analyze, proposed new regulations; (3) efforts to counteract agencies’ parochial perspective have not been as effective as they could be; and (4) incentives for ex post evaluation of ex ante estimates of the benefits and costs of regulatory actions are lacking.
Technical barriers stem from the way agencies conduct regulatory BCA, which tends to systematically bias the results. In particular, (1) analysts often start with a presumption that economic markets are fragile and prone to failure, but that their regulatory solutions will work exactly as planned, and that private decision makers are subject to cognitive biases that regulators somehow do not exhibit; (2) they identify co-benefits without searching for corresponding co-costs; (3) they apply risk assessment methods that are fundamentally incompatible with BCA; and (4) retrospective review is analytically challenging.
This article briefly reviews the process by which regulations are developed in the United States and the role for BCA. It then examines the institutional and technical factors limiting the use of BCA as a tool for improving regulatory policy. It concludes with some recommendations.