IN DEFENSE OF THE ECONOMIC ANALYSIS OF REGULATION
July 14, 2005
The application of economic analysis to regulatory decision making has become more controversial in recent years, particularly with regard to environmental, health and safety regulations.
In a landmark study of this issue, "In Defense of the Economic Analysis of Regulation," Robert W. Hahn, an economist who supports the use of economic analysis in measuring regulatory impacts, agrees that placing monetary values on the costs and benefits of regulation is difficult. Nevertheless, Hahn demonstrates that quantitative analysis has provided scholars and practitioners with useful insights into the policy process and has fostered more efficient regulation.
He shows how differences in the cost-effectiveness of different investments in life-saving activities could have important implications for public policy. For instance:
- It matters whether the government chooses to require reductions in radiation exposure form X-ray equipment ($23,000 per life saved) or radiation emission controls at uranium fuel cycle facilities ($34 billion per life-year saved).
- Similarly, economic analysis is helpful in deciding whether to pass a mandatory seat belt use law ($69 per life-year saved) or require airbag installation in cars ($120,000 per life-year saved).
Governments may choose to pursue all of these measures, but since resources are limited, we must have tools to help us prioritize our options, says Hahn. By applying economic analysis to the most comprehensive set of federal regulations, he found that cost-effectiveness varies over several orders of magnitude and approximately half of the individual regulations will not pass strict cost-benefit tests.
Additionally, he shows that reallocating funds to life-saving alternatives in developing countries could save more lives at the same or lower cost. Rather than eliminating quantitative analysis, Hahn recommends responding to legitimate concerns by gaining a deeper understanding of its strengths and weaknesses and using it wisely.
Source: Robert W. Hahn, "In Defense of the Economic Analysis of Regulation," American Enterprise Institute for Public Policy Research, June 22, 2005.
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