1. REGULATORY IMPACT ANALYSIS: COMPARING BENEFITS AND COSTS

2. What Benefit-Cost Analysis Tells Us
Benefit Cost Analysis is an exercise to assess efficiency in the provision of public goods, regulations and/or other policies
Is the overall provision of public and private goods with the regulatory action more efficient than the status quo?
Benefit cost analysis applies “the private market test” to a regulatory action or policy: If we could package up this policy, produce and sell it would we be better off?
Consistent with well-functioning private markets, the efficient outcome is the option that maximizes societal welfare (net benefits)

3. Comparing Benefits and Costs$
Costs
A regulation may have several options where benefits exceed costs. The most economically efficient approach is the one that maximizes net benefits.
Net Benefits = Benefits – Costs
This is not:
Benefits equal to costs
Maximized benefits
Minimized costs
Benefits
Maximum Net Benefits
Regulation R1 R* R2
R* = Most efficient
Moving from R1 (under-regulation) to R* increases efficiency
Moving from to R* to R2 (“over-regulation” reduces efficiency

4. Clear Baseline Definition: Key to an Accurate Benefit Cost Comparison
The benefit cost comparison involves
Comparing benefits versus costs to compute net benefits
Comparing net benefits across regulatory alternatives to determine the alternative that yields the highest net benefits
Benefits and costs for the chosen approach as well as benefits and costs for any alternative to that approach must be measured consistently, and in reference to a consistent baseline
Benefit cost analysis is an exercise to assess economic efficiency, and other considerations (like “fairness”) are not part of this exercise