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Friday, September 03, 2004

Cost-benefit analysis: not exactly neutral

Proponents of cost-benefit analysis in regulatory policy claim it is simply a neutral tool (that only coincidentally favors industry). Suppose CBA had been applied back in the 70s, when agencies issued many protections of the public interest that we know have been overwhelmingly successful. It could have changed history for the worse:

The first wave of modern environmental protection, beginning in the 1960s and 1970s, cleaned up the air and water, protected fragile ecosystems, and achieved great gains in public health — without reliance on cost-benefit analysis, and clearly without destroying the economy. Why can’t we continue to make environmental policy this way? Advocates of cost-benefit analysis must believe that times have changed: perhaps past environmental policies have already hit all the easy targets, where the need for regulation was obvious; in the standard metaphor, all the low-hanging fruit might already have been picked.

If this were the case, then the environmental regulations of the past should easily pass a cost-benefit test. If today’s methods of cost-benefit analysis had been applied in the past, would it have given its blessing to the early regulations which now look so successful in retrospect? The answer is no. We have compiled three case studies in coming to this conclusion: the removal of lead from gasoline in the 1970s and 1980s, the decision not to dam the Grand Canyon for hydroelectric power in the 1960s, and the strict regulation of workplace exposure to vinyl chloride in 1974. The technique would have gotten the answer wrong in all three cases. Each case study illustrates, in a different manner, the damage that cost-benefit analysis could have done in the past, had it played the central role that is proposed for it today. The problems with cost-benefit analysis of regulations lie deep within the methodology; it would have done no better a generation ago than it does now.