1. Cost-Benefit & Risk Analysis in Public Policy

2. Why these methodologies?
The benefits of public policies & programs come at a price: imposed costs
Public costs
Tax dollars
Government personnel
Private costs
Economic costs
Constraints on rights
How do we know when the benefits are worth the costs?
In a world of finite public and private resources, we need a standard for evaluating tradeoffs, setting priorities, and making choices.

3. Application in Public Policy
Setting a common standard for determining if a policy/program is worth implementing
Setting a common standard for choosing among policies/programs that compete for public resources
Neither are objective/scientific standards for decision-making

4. Cost-Benefit Analysis
How should government decide which policy are worthwhile?

5. Cost-Benefit Analysis
Societal Goal ≡ Economic Efficiency
Getting the most “output” for the least “input”
Maximizes overall social welfare
Method
Monetizing all significant costs & benefits
Probability Discounting for Uncertainty of Outcomes
Discounting for Time-value of money

6. Executive Order 12291 February 1981 --Reagan
Regulatory Impact Analyses
Cost-Benefit Analysis required
Submitted by all agencies
Reviewed by Office of Information & Regulatory Affairs
OMB office in White House

7. Executive Order 12291
Potential benefits to society must outweigh potential costs
Regulatory objectives must maximize net benefits to society
Regulations must impose least net costs to society in achieving objectives
Regulatory priorities must maximize aggregate net benefits to society taking into account
The state of the economy
The state of particular industries

8. CBA -Advantages
Comparability
Transparency
Ignorance Revelation

9. CBA -Limitations Economic valuation of public goods highly uncertain
Not traded in markets
Non-material values difficult to monetize
Existence values
Nuisance values
Aesthetic values
Cultural values
Historical values

10. CBA -Limitations Standing (stakeholders)
Whose benefits and costs do we count?
Among existing interests
Future generations
“non-human” stakeholders?
Failure to consider distributional effects
Equity (Caldor-Hicks criterion)
Those receiving benefits and those burdened with costs may not be the same

11. CBA -Limitations Societal Welfare ≠Σ Individual Welfare
What we want individually may not be what we want collectively
What about intensity of preferences?
Unstable Societal/Individual Preferences
Policy Outcomes are Uncertain
Sensitivity to characterization of probabilities
Future Values need discounting
sensitivity to choice of rates

12. Risk Analysis

13. Executive Order 12866 1993 --Clinton All regulatory agencies shall
“…consider, to the extent reasonable, the degree and nature of risks posed by various substances or activities within its jurisdiction”
Explain how any proposed regulatory action will reduce those risks

14. Risk Analysis Risk-Cost Analysis Risk-Risk (Tradeoff) Analysis
EPA Arsenic Rule
EPA Diesel Rule
Risk-Risk (Tradeoff) Analysis
DDT vs. Malaria
Chlorinated Water vs. Contamination
Vaccination vs. Disease

15. Risk Assessment & Analysis
Objective (Scientific) Dimension
Risk characterization
Subjective (Value-based) Dimension
What to do?
Uncertain Risks
Long-term v. short-term risks
Distributional (environmental justice) risks
Costly Risk reduction programs

16. Defining Characteristics of Risk
The probability of an adverse outcome
Type & severity of adverse outcome
The size of the exposed population
Certainty of risk estimates
Timing of adverse outcomes
Distribution of adverse outcomes

17. Scientific Dimension of Risk Assessment
Hazard Identification
Could this substance pose a health threat & if so, what kind?
Dose-Response Analysis
How does the degree of exposure to the substance related to the degree of toxic effect?
Exposure Assessment
What are the characteristics of public exposure to this substance?
Risk Characterization
Combining dose-response and exposure data, how is public health affected?

18. Subjective Dimension of Risk Assessment
How “bad” is bad?
Precautionary Principle: Assume toxicity until proven safe.
If in doubt, then regulate.
Free Market Principle: Assume it is safe until a hazard is identified.
If in doubt, do not regulate.
What is “Sound” Science?
How much science do we need to make the “right” decision?

19. Issues
Since no risk can be reduced to zero, who decides how “bad” is bad?
Who sets risk priorities?
Experts
Public

20. “Chemicals in the Environment Pose and Increasing Risk to Society”

21. “Animal Models are a Valid Method for Assessing Risk”

22. “Decisions about citing a HWF should be made primarily based on neighbors’ concerns, not risk numbers…”