Tuesday, November 3, 2009

On the Inevitability of Regulatory Benefit-Cost Analysis

My friends (meant literally) at the Center for Progressive Reform have released a white paper calling for the general abolition of benefit-cost analysis (BCA) from regulatory policy-making. With all due respect, I find this idea rather silly.

Assuming society's goal is to maximize some social welfare function, then it is extremely unlikely that society would ever want to spend the first and last unit of national income to resolve or avoid the very first unit of some social-cost problem. In which case, some form of benefit-cost analysis (BCA) is inevitable. So, the question is not whether benefit-cost analysis but only the form of BCA. It can be formal or informal. The virtue of formal BCA, if it is done properly, is that assumptions are transparent, and therefore contestable, and the analysis is replicable. Of course, other important questions remain about the BCA methodology - what should be included in the BCA, valuations of non-market goods, parameter values, etc. - and how much weight the BCA should carry in decision-making. But the notion that social decisions can (let alone should) be made without some form of BCA strikes me as absurd.

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