Basic Elements of Social Regulation

1. Basic Elements of Social Regulation I. Introduction II. What markets do--and don’t do III. Benefit-cost analysis IV. Cost-effectiveness analysis V. Elements of regulation

2. I. Introduction A. What “social regulation” is: Public regulation of market behavior or outcomes, but generally unrelated to market power B. How social regulation is different 1. Relation to market failure and “fairness” 2. Relation to nonmarket principles, e.g., ethical imperatives 3. Price/output effects are an indirect result.

3. I. Introduction C. Subject matter of social regulation: • Environment, e.g., pollution • Health and safety, e.g., work standards • Product attributes, e.g., fuel efficiency • Conservation, e.g. some farm subsidies

4. II. What markets do--and don’t do A. Market efficiency in the absence of externalities: P = MC B. Externalities and pricing solutions 1. What external costs are 2. Social cost = Private cost + eXternal cost 3. How external costs affect market outcomes 4. The standard (tax = eXternal cost) solution.

5. II. What markets do... C. Extensions and implications of the unregulated market solution 1. Two (or more) affected groups 2. Symmetry of the argument(s) 3. The Coase Theorem and its implications

6. II. What markets do.. D. Practical difficulties with the market outcome 1. Who can do what to whom? Efficiency vs “fairness?” 2. Cleanliness: is it a public good? 3. The environment is a common property resource, which reduces private incentives to maintain it. E. And there are other problems: 1. Moral imperatives and other concerns 2. Equity: distribution of income, wealth, and power 3. Information gaps 4. Should economic anaysis be disregarded altogether? If “yes, “ what do we put in its place?

7. III. “Efficient” social regulation:Benefit-cost analysis A. Relation to market analysis Relation to analysis of public expenditures B. Benefits 1. What “benefits” are in economic terms 2. Steps in the argument: a. How does the rule affect performance? b. How does performance improve the environment? c. How does improved environment affect human welfare? d. What is the increase in human welfare worth? 3. Difficulties in measurement

8. III. Benefit-cost analysis C. Costs 1. What “costs” are in economic terms 2. Generally easier to measure and less ambiguous D. The benefit-cost outcome: Numerical 1. B/C ratio > 1 implies desirability 2. Net benefits > 0 implies desirability E. Maximizing net benefits: the marginal solution. F. Is benefit-cost analysis acceptable? Should it be?

9. IV. “Efficient” social regulation:Cost-effectiveness analysis A. Given the benefit objective, what is the least costly way of achieving it? B. The rising marginal cost of damage reduction (compliance activity). 1. Between different forms of reduction (compliance) 2. Within the same form of reduction (compliance) C. The equimarginal outcome: Equation Ranking D. The sources of objection

10. V. Elements of regulation A. Basic economic tools 1. Taxes and subsidies 2. Information and exhortation 3. Direct regulation B. Standard setting 1. Broad standards: goals 2. Narrow standards: specifics

11. V. Elements of regulationB. Standard setting 2. Narrow standards a. Design/engineering/input b. Performance 3. Enforcement a. Certification b. Monitoring of output c. Post-sale surveillance d. Remedies: civil and criminal C. Research a. Continuous surveillance to improve current knowledge b. Technical or scientific