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 need 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 Outcomes 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 & Regulatory 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 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

Risk Analysis

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

Risk Analysis Risk-Cost Analysis Risk-Risk (Tradeoff) 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, 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?

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?

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’ concerns, not risk numbers…”