Cost-Benefit Analysis in a Regulatory Setting

The purpose of requiring cost-benefit analysis is to produce better out-comes from regulatory processes. If implemented well, cost-benefit analysis and risk assessment can produce improvements at several levels, by encouraging regulators to consider unintended effects of regulations and thereby avoid making things worse, to find the least burdensome approach to a goal, and to balance the pluses and minuses involved in choosing a goal. Whether these improvements will occur depends in large part on how cost-benefit analysis is implemented. Guidelines for conducting cost-benefit analysis and procedures for considering evidence on costs and benefits play an important role. This article describes how guidelines and rules of process can affect outcomes, and the issues that cost-benefit guidelines need to cover. Guidelines can affect the bias of a regulatory process toward one set of stakeholders or another, make outcomes more predictable, define the information needed for decisions, and provide a basis for legal challenges. The questions that guidelines should address include: what are costs and benefits, what constitutes good economics, what are standards of proof, how should unquantified costs and benefits be treated, how should uncertainties of cost-benefit estimates be dealt with, and how should alternatives be generated? The article concludes with recommen dations about how the adoption of cost-benefit analysis can be made most effective and beneficial in regulatory processes.