1. The Role of Distribution in Regulatory Impact Analysis (RIA)
Eliane Catilina, Ph.D.
U.S. Environmental Protection Agency
Office of Pollution Prevention and Toxics
Chemicals, Economics and Policy Analysis Division

2. Distributional Analysis: Positive vs Normative Issues
Distributional Analysis raises positive questions like…
To what extend do regulation benefit or harm those whose have high or low income, or who are very young or very old, or more vulnerable to disease? Does regulation disproportionally affect some entities, members of minority groups or residents of particular geographic areas?
… and normative questions such as…
Should we weight benefits and costs differently depending on who is affected? Or we are primarily concerned with the distribution of wealth? How should policy-makers address distribution?
We will focus our discussion on the positive questions/issues.

3. Distribution, Economic Impact Analysis (EIA), and Equity Assessment
Distributional Effects of regulations can be examined through Economic Impact Analysis (EIA).
An EIA focuses on traditional classifications of affected entities such as industrial sector classifications, governments, not-for-profit institutions, and small entities.
A related analysis, called an equity assessment, addresses the distribution of impacts across individuals and households, with particular attention to economically or historically disadvantaged or vulnerable groups (e.g., low income households, racial or ethical minorities, and young children).
Equity assessments are sometimes referred to as environmental justice (EJ) analysis.

4. Economic Impact Analysis: Affected Entities
Potentially Relevant Dimensions to Economic Analysis (EIA)
Dimension
Entity
Subpopulation
Sector
Industry or Government
Industries or state, local or tribal governments.
Entity size
Business, governments or not-for-profit organizations
Small Business, small governmental jurisdictions, or small not-for-profit organizations
Time
Individuals or households
Current or future generations
Geography
Regions
Regions, states, counties, or non-attainment areas.
Energy
Entities that use, distribute, or generate energy.
Energy sector

5. Statutes and Policies
In the U.S., Federal Regulations are influenced by both legislative (statutes) and administrative requirements (Executive Orders). Before issuing major regulations, agencies are required to conduct a cost and benefit analysis; they are also expected to assess how the impacts of the proposed regulation are distributed. Distributional or Economic Impact Analysis (EIA) is one of the components of the Regulatory Impact Analysis (RIA).

6. Conducting EIA: Profile of Affected Entities
I - Compiling an Industry Profile and Projected Baseline
Analysts should consider the impact in the regulated industry, as well as, how related industries may be affected.. Developing a detailed industry profile will identify those industry that may be affected positively or negatively by the regulation.
Substantial portion of EIA involves characterizing the state of the affected firms and industry in the absence of the rule as a basis for evaluating economic impacts.
Example of Important inputs used to defining an industry profile
North American Industrial Classification System (NAISC) industry code
Industry Summary Statistics
(U.S Department of Commerce Economic Census and The Small Business Administration)
Baseline Industry Structure
Baseline Industry Growth and Financial Condition
Characteristics of Supply and Demand

7. Conducting EIA: Profile of Affected Entities
II - Profile of Government Entities and Not-for-Profit Organization
- It should be considered whether a particular rule will directly affect government entities, not-for profit organizations, or house holds
Government entities may include: states, cities, counties, townships, water authorities, villages, Indian Tribes, special districts, and military bases.
Not-for-Profit entities may include: not-for-profit hospitals, colleges, universities, and research institutions.
Relevant factors for government entities may include
Relevant factors for not-for-profits entities may include
Number of people living in the community
Property value
Household income levels
Number of children
Number of elderly residents
Unemployment rate
Revenue amounts by source
Credit or bond rating for the community
Entity size and size of community served
Good or services provided
Operating costs
Amount and sources of revenue

8. Conducting EIA: Profile of Affected Entities
III - Profile of Small Entities
Small entities include small business, small governments and small not-for-profit institutions.
While these entities may require special considerations, the profiling of them should follow the same steps as discussed earlier.

9. Conducting EIA: Detailing Impacts on Industry
The following impacts should be taken in to account to determine whether a particular plant or industry is likely to bear a disproportionate portion of costs or benefits of a regulation:
Prices
Production
Employment
Related Industries
Growth and Technical Inefficiency
Industry Competitiveness
Profitability and Plant Closures
Energy Supply, Distribution, or Use

10. Conducting EIA: Detailing Impacts on Government and Not-for-Profit Organizations
The following impacts should be taken into account to determine whether a particular plant or industry is likely to bear a disproportionate portion of costs or benefits of a regulation:
Direct Impacts
Administrative, Enforcement, and Monitoring Burdens on Government
Induced Impacts on Government Entities

11. Conducting EIA: Detailing Impacts on Small Entities
The impact of a regulation on the following entities should be considered
Small Business
Small Governmental Jurisdictions
Small not-for-Profit Organizations

12. Economic Impact Analysis (EIA) and Benefit-Cost Analysis (BCA)
Important distinctions between EIA and BCA:
Total social benefits and total social costs are not of primary importance in EIA impact analysis as they are in cost-benefit analysis.
While a BCA relies on estimates of the social benefits and costs of a regulation EIA focuses on the private benefits and costs associated with compliance responses.
There is a great need for disaggregation in EIAs than in benefit-cost analyses placing heavy demands on the modeling framework.

13. Benefit-Cost Analysis and Distributional Issues
In BCA it is assumed that those people who have a standing (stakeholders) have the same relative importance.
A situation consistent with the potential Pareto or Kaldor-Hicks (KH) criterion (KR).
Expressed in a slightly different way, KR criterion is that a regulation is desirable if its benefits is greater than its costs, regardless of the distribution of each.

14. Distributional Weights
There is no agreed-upon approach on how to incorporate distributional consideration in CBA.
Ideally different people may be assigned different degrees of standing in a study.
Costs or benefits may mean more if imposed on one person than on another.
The relative levels of importance assigned to different people are called distributional weights.

15. Distributional Weights
One of the most common reasons for assigning people different levels of relative standing is income distribution.
That is, a program’s benefits may mean more if they go to poor people than if they go to rich people.
A program with negative net benefit may be desirable if the cost a re imposed to the rich and the benefits accrue to the poor.
A program with positive net benefits may be undesirable if most of the costs are borne by poor people while the gains accrue to the rich.

16. Modified KR Criterion
There are a number of practical approaches that modify the KH criterion to include distributional consideration in CBA.
McKean (1958): Includes in the list of cost and benefits the groups that will most likely bear costs and enjoy benefits.
In this case, the analysist needs not to make any decision about how different people will be weighted but can rather elevate the decision.

17. Modified KR Criterion
A second technique is to attach explicit weights to different groups affected by the project.
Each group’s gains or losses could be calculated; these gains or losses would be multiplied by the group’s distributional weight and these would be added together to generate a weight net benefit.

18. Modified KH Criterion Neighborhood Net benefits
Distributional weight 1
Weighted net benefit
Distributional weight 2 A
-100 1 B
+80
1.2
+96
1.4
+112
-20 -4
+12

19. Modified KH Criterion
Under the KH criterion, the project is undesirable because the net benefits are negative.
Increasing the relative weight attached to residents of neighborhood B by 20 percent still results in a negative assessment of the project.
But, increasing their weight by 40 percent results in a positive assessment.
The difficult parts of explicit distributional weighting are first determining how costs and benefits will be distributed among different segments of the population and then choosing distributional weights on which people can agree.

20. Modified KH Criterion
A third technique eliminates at least some of the difficulties of assigning distributional weights.
If costs and benefits can be divided between two groups, and a net benefit for each group can be calculated, it is possible to calculate the internal weight for the project.
An internal weight is a distributional weight assigned to the more disadvantaged group that will make the project’s weight benefits equal to zero.
The decision maker then decides whether the necessary weighting is reasonable or unreasonable.

21. Modified KH Criterion

22. Thank you!