Regulatory Impact Analysis: Analyzing Benefits Eliane Catilina, PhD U.S. Environmental Protection Agency Office of Pollution Prevention and Toxics Chemicals, Economics and Sustainable Strategies Division

Economic Benefits Analysis The aim of economic benefits analysis is to estimate the benefits in monetary terms of proposed policy changes in order to inform decision-making. Estimating benefits in Monetary terms allows the comparison of different types of benefits in the same units. It allows the calculation of net benefits so that proposed policy changes can be compared to each other and to the baseline.

Economic Value and Types of Benefits Economic Valuation is based on the traditional economic theory of human behavior and preferences, which centers on the concept of “utility” (satisfaction or welfare). Utility is inherently subjective and cannot be measured directly; therefore in order to give “value” an operational definition must be expressed in a quantifiable metric. Money is generally used as the metric. The economic valuation of an “improvement” is the dollar value of the private goods and services that individuals would be willing to trade for the improvement at a prevailing market price. The willingness to trade compensation for goods or services can be measured either as willingness to pay (WTP) or willingness to accept (WTA)

Economic Value and Types of Benefits Willingness to Pay (WTP): The maximum amount of money an individual would voluntarily pay to obtain a reduction in the chance of an adverse health outcome (death or illness). WTP does not measure compensation an individual would receive for experiencing a health outcome. Willingness to Accept (WTA): The least amount of money an individual would accept to forgo an improvement. WTP or WTA? Reduction in the chance of death or illness is a public good. The benefit of a policy are the sum of WTP or WTA across a given population.

Example: Human Health Benefits and Valuation Methods Human Health Improvements Mortality risk reductions Reduced Risk of Cancer fatality Acute Fatality Averting Behavior Hedonics Stated Preferences Morbidity risk reductions Cancer Asthma Nausea Cost of Illness (COI) Source: U.S. Environmental Protection Agency (U.S. EPA).2010. Guidelines for Preparing Economic Analyses. EPA 240R-10-001)

Economic Valuation Methods for Benefit Analysis Economists have developed a number of methods to value benefits. Revealed Preferences: When WTP can be inferred from choices in related markets. Stated Preferences: Rely on choice data that are stated in response of hypothetical situation.

Revealed Preferences Methods Hedonic Pricing Models: Estimate economic benefits by weighting the advantages against the costs of different choices. Use statistical methods to measure the contribution of a good’s characteristics to its price. Hedonic wage studies Hedonic Property Value studies Other Hedonic Studies.

Revealed Preferences Methods Cont. Averting Behavior Models: Infer values for health improvement concerns from observations of actions people take to avoid or mitigate the increased health risks. If there is a continuous relationship between defensive actions and reductions in health risk then the individual will continue to avert until the marginal cost just equals the marginal WTP for these reductions The value of small change is health risks can be estimated from two primary source of information: The cost of the averting behavior or good Its effectiveness, as perceived by the individuals, in offsetting the loss in environmental quality. Issues Related to Averting Behavior Models Perceived versus Actual risks Data Requirements and Implications Separability of joint benefits Modelling Assumptions

Revealed Preferences Methods Cont. Cost of Illness (COI): It’s an alternative to WTP estimate. It estimates the financial burden of an illness based on the combined value of direct and indirect cost associated with the illness. Direct Costs: expenditure associated with diagnosis, treatment, rehabilitation, accommodation. Indirect Cost: The value of illness-related lost income, productivity and leisure time. Developing COI estimates requires less resources than other revealed preferences methods (WTP).

Non-Monetized Benefits It may not be possible to quantify all the significant impacts for all policy options. How to present non-monetized benefits Qualitative Discussions Alternative Analyses Break-even analysis Bounding Analysis

Stated Preference Methods Stated Preference Methods rely on data drawn from people’s response to hypothetical questions. Responses from Stated Preference Survey, if truthful, are either direct expression of willingness to pay or can be used to estimate willingness to pay. Different types of Stated Preference Studies: Direct WTP Questions Stated Choice Questions Dichotomous Choice WTP Multi-Attribute Choice Question Evaluating Stated Preference Results.

Benefit Transfer Benefit transfer is used to estimate non-market values of environmental quality changes from one study in the evaluation of a different policy of interest. Benefit transfer can reduce both time and costs to develop estimates of proposed policy’s benefits. OMB requires a clear justification to use this approach.

Benefit transfer Conducting benefit transfer: Describe the policy case Select study case Transfer values Unit value transfer Function transfer Meta-Analysis: Is a set of techniques that synthesize the summary results of empirical research. Use results from multiple valuation studies to estimate a new transfer function.

Standard Methods for Valuating Mortality and Morbidity Risk Reduction Economist exam how people react to risks in their own lives and make tradeoffs between small risk and income. These tradeoffs, applied to small risk changes over a group of people, have historically been summarized as “value of statistical life” or VSL. For example if each of 10,000 people exposed would pay $700 then in total one statistical life is “saved” and total WTP is$7 million. Morbidity Economists prefer to use “willingness to pay” to measure the complete value of avoiding a health condition outcome. Revealed preferences from labor market studies provided values for fatal risk reductions. Stated preferences provide values for chronic illness and acute respiratory effects If necessary, we can use the “cost of illness”. This captures the direct dollar savings to society of reducing a health effect, but it ignores the value to individuals to reduce pain and suffering. It’s considered a lower bound when no WTP estimates are available.

*prepared by Judith Brown (EPA/OPPT/CESSD/EPAB) Examples* *prepared by Judith Brown (EPA/OPPT/CESSD/EPAB)

Human Health Improvement: Mortality Economists examine how people react to risks in their own lives and make tradeoffs between small risks and income. Policies aim at reducing human mortality risks due to potentially fatal health conditions as cancer. Value of Statistical Live (VSL): Is the marginal rate of substitution between wealth and risk of dying. Units of dollars per statistical death per year. Value of Mortality Risk (VMR): Have the same underlying concept as VSL. Dollars per micro-risk per person per year, where micro-risk represents a one in a million change of dying.

Human Health Improvement: Morbidity Reductions in the risk of non-fatal health effects ranging from mild illness such headache and nauseas to serious illness such as cancer. It also includes conditions as birth defects or low birth weight. Willingness to pay to reduce the risk of experience an illness is the preferred measure of the value for morbidity effects.

Components of Cancer Risk Reduction Value Cancer cases fall into two general categories Fatal Nonfatal WTP to avoid occurrence of cancer Value of micro-risk reduction depends on both age at time of exposure and age at diagnosis in addition to cancer type We do not estimate specifically the number of potential cases of cancer avoided under a given regulatory option. Benefits are calculated based on the value of reducing the risk of a cancer diagnosis. Small reductions in risk over an affected population can result in a large benefit to society.

Information Needed to Monetize Benefits Input from other Scientific Disciplines for well defined Rule Options Health Endpoints with dose/concentration response functions Central Tendency Baseline Dose-Response (e.g., oral slope factor, inhalation unit risk) - ideally Central Tendency Dose-Response for Rule Options by effect type - ideally Valuation method of health endpoint such as: Value of Mortality Risk (VMR) Cost of Illness (COI) Willingness to Pay (WTP) Affected Population Estimates

Example 1: Methylene Chloride in Paint Removers Multiple types of monetized benefits Cancer (chronic, occupational only) Multiple types (liver and lung) Benign Mammary Tumor (technically noncancer but calculations almost identical) Fatalities (acute, occupational and consumer) Nonmonetized benefits Typically there are benefits that for numerous reasons cannot be monetized, but they should still be captured and described qualitatively for inclusion in policy decisions

Methylene Chloride: Valuation of Reduced Risk of Non-cancer Fatalities Total estimated micro-risk reductions by cancer type Survival rates vary by cancer type so the IUR for combined cancer was not used in our benefits estimation Individual IURs were calculated for liver, lung, and benign mammary tumors Multiplied by appropriate average value of micro-risk reduction Calculated from the risk trade-off between health consequences and sudden death Benefits calculated by Regulatory Option Microrisk reductions x WTP value = Benefits

Components of Fatality Reduction Value Uncommon to be able to count literal bodies for an EPA rulemaking Acute exposure only (occupational and consumers) Center for Disease (CDC) data indicates average of one fatality per year in the bathtub refinishing industry Other industry sectors have recorded deaths, but not enough to include in monetized estimates Poison Control data allowed us to assume one fatality every three years Monetization for fatalities uses VSL estimate developed by NCEE

Example 2: Lead Residential RRP Rule RRP: Renovation, Repair and Painting Exposure scenarios simulated used Monte Carlo analysis Health endpoints monetized for children under 6 only IQ decrements

Collaboration of Efforts Example of importance of multiple divisions working in sync and not in ‘silos’ Strong overlapping of exposure modeling, economic analyses, and development of regulatory options Without continuous communication between the exposure assessor, risk assessor, and economist, the office could of easily ended up with analyses from the different divisions that were incompatible Communication with the lead division was also integral to ensure the modeling accurately captured the potential rule options impact on changes in exposure and benefits.

From Lead Exposure to IQ Decrement Valuation Estimate the amount of lead contamination due to the renovation project under various assumptions about cleaning (baseline & rule options) Estimate the blood-lead levels resulting from this contamination Estimate the adverse health effects (loss in IQ points) due to increased blood-lead levels using dose-response functions Capture fractional IQ decrements Assign medical costs, reduced income, or another proxy for willingness-to-pay to avoid the adverse health effects.

Monetized Value of IQ Point Value is modeled as the present value of a loss in expected lifetime earnings due to an IQ point loss Assume most start working at age of 18 and retire by age 67 Lifetime earnings calculated from Current Population Survey Annual Survey Annual Social and Economic Supplemental and Life Tables from the National Vital Statistics Report published by the CDC Average earnings for male and female, accounting for educational attainment Survival rates by gender and probability of being male or female at any given age Calculation technique sometimes referred to as cross-tabulation

Example 3: NMP in Paint Removers Developmental toxicity endpoints Low Birth Weight (chronic, occupational only) Fetal Death (acute, occupational and consumer) No dose-response function for either health endpoint No method developed to truly monetize endpoints

Policy Issue Need a way to balance cost and benefits Are we getting offsetting gains for the costs being incurred With these endpoints no way to answer the question directly Breakeven analysis to provide some information for policy makers to base decisions However this type of analysis DOES NOT provide monetized benefits that can be used in a cost/benefit ratio or to meet the Circular A-4 requirements

Breakeven Analysis Determine how many cases of health endpoint X would need to be prevented to offset the cost of Regulatory Option A Valuation of endpoint following COI approach Affected population Women of childbearing age For acute effects, women of childbearing age potentially exposed at acute level Did not breakeven for any of the Rule Options

Imperfect Estimates COI estimates only No WTP estimates could be found for LBW or Fetal Death Long term impacts of LBW birth are not included Estimate of the number of cases in general but not specific to LBW or Fetal Death caused directly by NMP or even general chemical exposure Numbers can be taken out of context if not cautious with how the numbers are described or shared However, policy decision makers need some information to help weigh the Rule Options

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