Cost-Benefit & Risk Analysis in Public Policy

1. Cost-Benefit & Risk Analysis in Public Policy

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

3. 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

4. Cost-Benefit Analysis How should government decide which policy are worthwhile?

5. 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 Outcomes • Discounting for Time-value of money

6. Executive Order 12291 • February 1981 --Reagan • Regulatory Impact Analyses • Cost-Benefit Analysis required • Submitted by all agencies • Reviewed by Office of Information & Regulatory Affairs • OMB office in White House

7. 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

8. CBA -Advantages • Comparability • Transparency • Ignorance Revelation

9. 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

10. 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

11. CBA -Limitations • Societal Welfare ≠Σ Individual Welfare • What we want individually may not be what we 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

12. Risk Analysis

13. Executive Order 12866 • 1993 --Clinton • All regulatory agencies shall • “…consider, to the extent reasonable, the degree and nature of risks posed by various substances or activities within its jurisdiction” • Explain how any proposed regulatory action will reduce those risks

14. 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

15. 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

16. 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

17. Scientific Dimension of Risk Assessment • Hazard Identification • Could this substance pose a health threat & if so, what 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?

18. 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 “right” decision?

19. Issues • Since no risk can be reduced to zero, who decides how “bad” is bad? • Who sets risk priorities? • Experts • Public

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

21. “Animal Models are a Valid Method for Assessing Risk”

22. “Decisions about citing a HWF should be made primarily based on neighbors’ concerns, not risk numbers…”