New Foundations of Cost-Benefit Analysis

Innovation and Economic Growth and Competition Policy and Antitrust

Article Snapshot

Author(s)

Matthew Adler and Eric Posner

Source

Harvard University Press, 2006

Summary

This book looks at how regulators use economic theory to assess new rules.

Policy Relevance

Administrative agencies should use cost-benefit analysis to decide whether rules tend to make people better off, roughly speaking.

Main Points

  • Economists argue that administrative agencies should use cost-benefit analysis (CBA), asking whether new regulations would cost more than they benefit everyone overall.
    • Often the hope is to ensure that rules do less harm than good, by having those who benefit compensate those who are harmed (“Kaldor-Hicks efficiency”).

  • Kaldor-Hicks efficiency does not always make sense. It is best to think of CBA as a rough proxy for whether a rule benefits people overall, one tool among several agencies use.
    • Making people better off carries moral weight.
    • Agencies should ignore people’s preferences when they are not well-informed.

  • In environmental law, CBA puts little weight on future generations or things that nonhumans value, but most statutes agree with this approach.

  • CBA should be done by the Office of Management and Budget, which is attached to the White House, because the President is most sensitive to what most Americans value.

  • CBA has weaknesses, but it is better and more objective than many other types of regulatory assessment such as intuitive balancing or “feasibility analysis.”

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