1. Benefit-Cost in Practice: Implementing the Efficiency Standard
Chapter 10
Benefit-Cost in Practice:
Implementing the
Efficiency Standard

2. Introduction
From the efficiency perspective, pollution should be reduced until the additional costs of control just outweigh the additional benefits
Calculate all the costs
Calculate all the benefits
This allows us to pinpoint the efficient level of pollution through benefit-cost analysis

3. Regulatory Impact Analyses
The EPA conducts formal benefit-cost analyses (known as regulatory impact analyses or RIAs) of any new regulation expected to cost more than $100 million
For safety-based laws, EPA is supposed to examine several different options that achieve a safety goal and choose the most efficient

4. A “Good” Benefit-Cost Study
A good benefit-cost study will
Follow accepted procedures
Provide a clear statement of all assumptions
Point out uncertainties where they exist
Suggest realistic margins of error

5. Doing Benefit-Cost 1: Lead Standards
Under the Safe Drinking Water Act, the EPA was required to establish “action standards” for lead in drinking water
Lead leaches from solder in older water systems

6. Three Options

7. Estimating Costs
Determine which of the 63,000 plus systems nationwide would require remedial action, and at what level, to achieve the three different targets
Establish engineering cost estimates for the different steps
Study gives a plus or minus 50% range for uncertainty in its cost estimates

8. Estimating Benefits

9. Estimating Benefits

10. Estimating Benefits: What’s Missing?

11. EPA’s Summary
What’s Missing?!

12. The Most Efficient Option
The net monetary benefits to society of the three options are:
Option A: $62,685 million
Option B: $59,601 million
Option C: $20,670 million
The most efficient option then is option A because it maximizes the net monetary benefits to society

13. Estimated Benefits and Costs of Reducing Lead

14. Benefit-Cost Ratio
The benefit-cost ratio is the value of the benefits of an option divided by its costs
B/C ratio greater than one means total benefits exceed total costs
Options A, B, and C all have B/C ratios greater than 1
Greatest B/C ratio is not the same as the most efficient option…

15. Uncertainty of Benefit-Cost Estimates

16. The EPA’s Choice
Interestingly, the EPA did not choose Option A despite it being most efficient
In fact, the report never acknowledged that option A was the most efficient!!
Instead, the agency relied on the uncertainty in the benefit estimates and opted for the less expensive option B

17. Lessons
Due to substantial uncertainty, benefit-cost analysis cannot discriminate between “relatively close” options
Note: the B/C ratio has nothing to do with efficiency
The B/C ratio for A was lower (11) than option B (15.3)

18. Doing Benefit-Cost2 : Landfill Regulation
The EPA, under the Resource Conservation and Recovery Act (RCRA), was directed to draft regulations for the siting, construction and maintenance of municipal solid waste landfills
Two approaches
Pollute and cleanup
Prevention

19. Cost Estimates
EPA cost estimates, based on the engineering approach, included expenses associated with:
Land clearing
Excavation
Equipment
Labor
Liner materials
Groundwater monitoring wells
Most added costs for the “pollute and cleanup” option were for corrective action, while 50% of the added costs for the “prevent” option were for liners

20. Benefit Estimates Two quantitative estimates Reduction in cancer risk
Estimated risk of cancer is 5.7 over the next 300 years
Both plans reduce this risk by 2.4 over the 300 year period: why?
Avoided cost of replacing damaged groundwater
Cost of replacing with an alternative supply; this probably overstates the benefits

21. Is either option efficient?

22. No Assumpting that: Both plans are losers by an efficiency standard
All benefits are captured by mitigating the effects on groundwater, and
The study’s complex modeling process generates “precise” benefit and cost predictions
Both plans are losers by an efficiency standard
Complying with existing water laws costs $2.5 billion more than supplying groundwater users with a new supply
Moving to a pollution prevention strategy makes matters even worse

23. Are there missing benefits from the prevention option?
Stricter standards may encourage more recycling and waste reduction. Are these benefits likely to be large?
Bottom-line: very few people depend on water that might be contaminated by municipal landfills. Benefits of regulation likely to be small.

24. Benefit-Cost Problems
These two examples illustrate “good” benefit-cost studies
There are lots of “bad” studies manufactured by “economists-for- hire”
But even honest analysts face pressures:

25. Political Influence In Benefit-Cost
Regulatory politics
Agenda control
Hard numbers problem
Paralysis by analysis

26. Regulatory Politics
EPA benefit-cost analysts may face pressure from their superiors at the Office of Management and Budget (OMB) to generate numbers in support of their preferred rule
Study may be put off until decisions have already been made

27. The Scientific Agenda
Big business has influenced the scientific agenda by funding conferences and targeting research in certain areas
Even academic scientists must often obtain research funding from industry

28. Hard Numbers Problem
Benefit-cost studies can provide a false sense of precision to decision makers
“Hard” numbers are really “soft” when uncertainty and incomplete benefit coverage are factored in
Decision makers don’t want uncertainty; they want an answer

29. Paralysis by Analysis Paralysis by analysis:
Opponents of government action can resort to the legal system and exploit the uncertainty in the process to delay or block the implementation of regulations

30. Summary: Is Benefit-Cost Analysis Useful?
Two questions?
Is it capable of identifying the efficient pollution level? (this chapter)
Is efficiency in pollution control the right standard? (previous chapters)

31. Up to the Job? Yes
While benefit-cost analysis cannot pinpoint the efficient pollution level with the accuracy suggested by diagrams, it is helpful when uncertainty about benefits is low (landfill case?)
More generally, BCA:
Provides a framework for a general “balancing” of benefits against costs
Can rank dissimilar proposals in terms of efficiency

32. Up to the Job? No.
Benefit-cost’s fatal flaw is its inability to price the values of life, health, nature and the future.
Especially over the long run choice of a discount rate can dramatically alter the conclusions of benefit-cost studies.

33. Up to the Job?
We report. You decide.