Regulatory

Analysis II

OMB Circular A-4

Regulatory Analysis required by

Executive Order 12866
OMB Circular A-4 outlines ___best
practices___ for conducting a
regulatory analysis
Produced by government employees
with the aid of prominent academic
scholars in law, economics, and public
health disciplines

Why Have Regulatory

Analysis?
Provides estimates of expected benefits
and costs of proposed regulations
Useful for public consumption as well as
for government decision makers
Forces agencies to _justify_ their actions
using an objective metric
Reduces the possibility of ____political or
other self-interested___ behavior
undermining the regulatory process

On what grounds might regulatory

analysis be criticized?

Elements of Regulatory
Analysis
1.

A statement of the need for the

proposed action

2.

Examination of alternative
approaches

3.

Evaluation of benefits and costs of

the proposed action

1. The Need for the

Proposed Action

Show statutory or other _authority__

Demonstrate __market failure____ or
other social purpose

Other social purpose allows govt. to

deal with problems not characterized by
market failure e.g. redistribution

Make a case for Federal regulation

over ___alternative__ solutions
Economic regulation presumed invalid

2. Alternative
Approaches

Options under statutory mandate

Is regulation required?
Stringency of regulation?

Compliance/Effective Dates
Costs decrease as the time between
publication of rule and date of required
compliance increases
__Benefits___ typically remain constant

2. Alternative
Approaches

Enforcement methods
recordkeeping, inspections, testing
Balance: cost vs. effectiveness of
regulation

Requirements by firm size

Remember the iron rule!

Regionally disparate requirements

Politically difficult, but can make sense

2. Alternative
Approaches

Performance Stds. vs. Design Stds.

Regulate outcomes vs. regulate process
Flexibility (efficiency) vs. enforceability

Market Approaches vs. Direct Controls

Use economic incentives?

Information vs. Regulation

Labeling requirements
Rating systems
Government information campaigns

3. Evaluation of Benefits
and Costs
Benefit-Cost Analysis (BCA)
Estimates the benefits and costs of a
proposed rule
Uses monetary measures for both benefits
and costs

Cost-Effectiveness Analysis (CEA)

Estimates the cost of a rule per expected
unit of benefit
Example: rule costs $1 million per life
saved

Benefit-Cost Analysis
(BCA)
Advantages:
Gives understandable summary measures
for costs and benefits
Allows a policy maker to maximize net
benefits of regulation

Disadvantage:

The monetization of benefits may not be

possible or may be controversial

Cost-Effectiveness Analysis
(CEA)
Advantage:

No need to monetize health, environmental

amenities, etc.

Disadvantage:

Can be difficult to compare alternatives. e.g

how do you compare :
measure 1 (1 life saved, 300 illnesses avoided per
$1 million cost)
measure 2 (1000 illnesses avoided per $1 million
cost)

Distributional Effects

Can be used as a need for regulation

Always required in analysis

Why are distributional effects

important?

General Issues in BCA &

CEA

Scope
Residents & citizens of the US public
Others (analyze separately why?)

Baseline
The magnitude of the problem in the
absence of a rule
Analysis must adjust for expectations of
change in baseline

Market evolution, external factors, other

regs, compliance

General Issues in BCA &

CEA

Evaluation of Alternatives

Agency must show that BCA or CEA has

been done for alternatives
Shows that agency actually attempted to
maximize net benefits

Transparency
Science must be well-documented
Methodology must be well-documented
Acts to

Keep govt honest

Allow outsiders to check results find errors

Regulatory Analysis:
Summary

Provides a check (by OMB) on

regulatory agencies
Gives policymakers an incentive to
pursue the public interest
Provides a check against rash and ill
chosen decisions

Addresses most of the issues we

have discussed as being important