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Abstract:
Prediction markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as a presidential election. Using these markets as forecasting tools could substantially improve decision making in the private and public sectors.

We argue that U.S. regulators should lower barriers to the creation and design of prediction markets by creating a safe harbor for certain types of small stakes markets. We believe our proposed change has the potential to stimulate innovation in the design and use of prediction markets throughout the economy, and in the process to provide information that will benefit the private sector and government alike.

prediction markets, public policy, forecasting, regulation

Abstract:
Ethanol production in the United States has been steadily growing and is expected to continue growing. Many politicians see increased ethanol use as a way to promote environmental goals, such as reducing greenhouse gas emissions, and energy security goals. This paper provides a benefit-cost analysis of increasing ethanol use based on an analysis by the Environmental Protection Agency. We find that the cost of increasing ethanol production to almost ten billion gallons a year is likely to exceed the benefits by about three billion dollars annually. We also suggest that earlier attempts aimed at promoting ethanol would have likely failed a benefit-cost test, and that Congress should consider repealing ethanol incentive programs, such as the ethanol tariff and tax credit.

benefit-cost analysis, regulation, energy policy, environmental economics, ethanol

Abstract:
Network neutrality is a policy proposal that would regulate how network providers manage and price the use of their networks. Congress has introduced several bills on network neutrality. Proposed legislation generally would mandate that Internet service providers exercise no control over the content that flows over their lines and would bar providers from charging more for preferentially faster access to the Internet. These proposals must be considered carefully in light of the underlying economics. Our basic concern is that most proposals aimed at implementing net neutrality are likely to do more harm than good.

network neutrality, legislation, economics

Abstract:
Network neutrality issues have been vigorously debated worldwide over the past few years. One major aim of network neutrality proponents is to prevent high-speed Internet service providers from charging content providers for priority delivery. Recently, proponents have turned their attention to the regulation of wireless networks, such as those for cellular phones, which provide increasing numbers of consumers access to Internet services. Some application providers have relied on a recent academic paper to support greater regulation of wireless operators. Although the proposals to regulate these networks use the phrase "net neutrality," the regulations they seek to impose on wireless operators have little in common with those being sought for other Internet service providers. In this article, we provide a framework for determining whether certain kinds of regulations should be imposed on the owners of wireless networks. We also consider the benefits and costs of specific proposals for the regulation of these networks. Our principal conclusion is that the costs of most of these proposals are likely to exceed the benefits.

network neutrality, regulation, wireless networks

Abstract:
By serving as a key revenue source for online content providers, online advertising has been instrumental in the development of innovative websites. Continued innovation among content providers, however, depends critically on the competitive provision of online advertising. Suppliers of online advertising provide three primary inputs - (1) advertiser tools, (2) intermediation services, and (3) publisher tools. Certain suppliers such as Google provide a platform that combines the inputs into one integrated service. In this paper, we focus on the overlapping products sold to advertisers by Google and DoubleClick - namely, the supply of advertiser tools. Because the supply of advertiser tools is highly concentrated, Google's proposed acquisition of DoubleClick raises important questions for antitrust authorities. Proponents of this acquisition argue that Google and DoubleClick do not compete - that is, buyers of search-based or contextual-based advertising (the two advertising channels in which Google participates) do not perceive graphic-based advertising (the advertising channel in which DoubleClick participates) to be substitutes. Thus, they conclude that the proposed acquisition would not lead to higher prices.

In this paper, we examine economic evidence and legal precedent to help identify the relevant antitrust product market for Google's proposed acquisition of DoubleClick. According to the Federal Trade Commission and Department of Justice Horizontal Merger Guidelines, product markets are defined by the response of buyers to relative changes in prices. To inform how buyers - in this case, online advertisers - would respond to relative changes in price across the three online advertising channels (search, contextual, and display), we analyze the results of a survey of online retailers. The survey suggests that (1) a significant share of online advertisers would substitute among the three channels in response to relative changes in prices, and (2) a significant share of DoubleClick customers would turn to Google before any other supplier in response to an increase in the price of DoubleClick's advertiser tools. In particular, the survey indicates that a combined Google-DoubleClick would likely have a greater incentive to increase the price of DoubleClick's advertiser tools relative to a stand-alone DoubleClick offering.

Google, DoubleClick, antitrust, online advertising, market definition, search, merger analysis

Abstract:
Expenditures incurred because of federal environmental, health, and safety regulation have grown dramatically in recent decades, and now total several hundred billion dollars annually. These costs appear likely to increase significantly in the next decade, as well. Yet the economic impacts of regulation receive much less scrutiny than direct, budgeted government spending. The potential gains of regulatory reform are substantial. Research suggests that more than half of the federal government's regulations would fail a strict benefit-cost test using the government's own numbers (Hahn, 1998). There is ample research suggesting that regulation could be significantly improved, so that we could save more lives with fewer resources (Morrall, 1986; Viscusi, 1996). One study found that a reallocation of mandated expenditures toward those regulations with the highest payoff to society could save as many as 60,000 more lives a year at no additional cost (Tengs and Graham, 1996). Recently, Congress has begun to show a greater interest in assessing the economic impact of regulation. In 1996, Senator Ted Stevens of Alaska added an amendment to the Omnibus Consolidated Appropriations Act of 1997 that required the director of the Office of Management and Budget (OMB) to provide Congress with estimates of the total annual benefits and costs of all federal regulatory programs and estimates of the benefits and costs of individual regulations. This statute was the first to mandate such an accounting. In September 1997, the OMB produced its first report on the benefits and costs of regulation in response to the Stevens amendment, and it recently completed a second report in the fall of 1998. At this point it is not clear whether Congress will require additional reports. This essay reviews the increasing use of economic analysis in regulatory decision-making, assesses the first OMB report, and considers how the use of economic analysis can help to inform regulatory decision-making.

Abstract:
Environmental economists have seen their ideas translated into the rough-and-tumble policy world for over two decades. They have witnessed the application of economic instruments to several environmental issues, including preserving wetlands, lowering lead levels, and curbing acid rain. This essay examines the impact of the rise of economics in the policy world on the making of environmental policy. I focus on two related, but distinct phenomena-the increasing interest in the use of incentive-based mechanisms, such as tradable permits, to achieve environmental goals; and the increasing interest in the use of analytical tools in regulatory decision making, such as benefit-cost analysis.

I argue that economists and economic instruments have had a modest impact on shaping environmental, health and safety regulation, but that economists will play an increasingly important role in the future. Although the role of economics is becoming more prominent, it does not follow that environmental policy will become more efficient. This apparent inconsistency can be explained by the political economy of environmental policy.

Abstract:
The linkLine price squeeze case from the Ninth Circuit is the most important antitrust case that the Supreme Court could take during the Fall 2007 Term. Amici are professors and scholars in law and economics who have taught, or have conducted research on, antitrust law and the economics of industrial organization. They include William J. Baumol, Robert H. Bork, Robert W. Crandall, George Daly, Harold Demsetz, Jeffrey A. Eisenach, Kenneth G. Elzinga, Gerald Faulhaber, Franklin M. Fisher, Charles J. Goetz, Robert Hahn, Jerry A. Hausman, Thomas M. Jorde, Robert E. Litan, Paul W. MacAvoy, J. Gregory Sidak, Pablo T. Spiller, and Daniel F. Spulber.

We agree with the petitioners that the Ninth Circuit has generated an inescapable conflict among circuits, and that the Ninth Circuit's opinion below is incompatible with this Court's reasoning in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S. Ct. 1069 (2007), and Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). We agree with Judge Gould's dissent in linkLine that Trinko "takes the issues of wholesale pricing out of the case," such that the plaintiffs' only possible remaining theory of harm would be predatory pricing at the retail level - which the plaintiffs did not allege. linkLine Commc'ns Inc. v. Pac. Bell Tel. Co. d/b/a/ AT&T Cal., Inc., No. 05-56023, 2007 U.S. App. LEXIS 21719, at *28-29 (9th Cir. Sept. 11, 2007) (Gould, J., dissenting). We also agree with Judge Ginsburg's opinion for the D.C. Circuit in Covad Communications Co. v. Bell Atlantic Corp., 398 F.3d 666 (D.C. Cir. 2005), which in turn embraces the conclusion of the Areeda-Hovenkamp treatise that "'it makes no sense to prohibit a predatory price squeeze in circumstances where the integrated monopolist is free to refuse to deal.'" Id. at 673-74 (quoting 3A Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 767c3, at 129-30 (2d ed. 2002)). The existence of a rule like linkLine has a pervasive impact on business behavior that, at the margin, affects competition and consumers. This deleterious effect extends beyond the telecommunications industry to affect all firms that do business in the Ninth Circuit. These reasons justify granting certiorari in linkLine and reversing the Ninth Circuit's decision.

In our minds, an even larger reason than those described above makes it imperative that the Court take this case. The Ninth Circuit's decision in linkLine implicates the normative foundation of modern Sherman Act jurisprudence: that antitrust law exists to advance consumer welfare. We have three points to make.

First, any rule of price-squeeze liability that threatens liability based on the claim that the difference between a firm's upstream and downstream prices leaves downstream rivals insufficient margin substitutes a rule of competitor welfare for consumer welfare.

Second, properly understood, a price squeeze is a regulatory issue, which makes sense only as a rule of price regulation in an industry already subject to duties to deal and to control by institutionally competent regulators. Attempting to implement regulatory policy through section 2 of the Sherman Act is ill-advised, both because it makes no sense for courts to re-regulate deregulated or lightly regulated industries, and because courts lack the institutional competence to implement regulation.

Third, the Ninth Circuit's rule is of pressing concern precisely because it will deter efficiency-enhancing conduct and competitive pricing. Vertical integration and partial integration are ubiquitous, and firms need to be able to make decisions about such integration without the threat of liability. Vertically integrated firms likewise need to be free to cut retail prices (as long as the prices are not predatory) without concern for rivals - the point of Brooke Group. Moreover, the Ninth Circuit's standard is so vague and open-ended that it creates uncertainty and invites litigation; it also permits imposition of liability based on apparently subjective evaluation of disputed and hard-to-prove facts, which will lead to a substantial risk of false positives.

Abstract:
In response to the increasing impact of regulation, several governments have introduced economic analysis as a way of trying to improve regulatory policy. This paper provides a comprehensive assessment of government-supported economic analysis of regulation. We find that there is growing interest in the use of economic tools, such as benefit-cost analysis; however, the quality of analysis in the U.S. and European Union frequently fails to meet widely accepted guidelines. Furthermore, the relationship between analysis and policy decisions is tenuous. To address this situation, we recommend pursuing an agenda that allows economics to play a more central role in regulatory decision making. In addition, we suggest that prediction markets could help improve regulatory policy and improve measurement of the impact of regulation.

Abstract:
While there is general agreement among economists that the new economy has helped stimulate innovation and growth, there is a vigorous debate about when to intervene on behalf of consumers. The basic conundrum that antitrust authorities face is that scale economies in production and consumption provide an economic justification for having a single firm dominate a market.

This article characterizes the debate on antitrust and the new economy, using the Microsoft case as a key example. Antitrust policy is critical because it helps determine the rules of the road by which firms can compete and merge. Policy proposals for regulating the new economy fall loosely into two camps - those that advocate intervention in some of these markets and those that generally advocate not intervening in these markets. The interventionists focus on possible barriers to entry that could be imposed by a dominant new economy firm. The non-interventionists highlight the self-corrective nature of new economy markets, and assert that the costs of taking action on the part of government is high compared to the cost of doing nothing. Noninterventionists also question the extent to which surgical antitrust interventions are feasible or appropriate.

The paper offers six recommendations for improving policy. These include: recognizing the slow speed of antitrust policy relative to the new economy; evaluating new economy antitrust issues on a case-by-case basis; using a framework that highlights dynamic competition for new economy antitrust issues; erring on the side of caution in regulating new economy markets; reducing political rent seeking opportunities in these markets; and learning more about how these markets actually function.

Abstract:
Scholarly efforts to analyze the impact of the protection of intellectual property go back centuries. Despite the long history, however, many key questions have yet to be conclusively answered. Here, I review the research on the economics of patents, covering topics of particular relevance to policymakers. I examine studies on the role of patent strength in spurring innovation, diffusing information, transferring technology, speeding commercial development of inventions, and stimulating economic growth.

The most general lesson to be gleaned from the patent literature is that there are few general lessons. Economic models of patent regimes rarely provide unambiguous answers to practical questions such as the appropriate scope for patents and their optimal duration. While researchers have reached a consensus in a couple of areas, such as the evidence that strong intellectual property rights assist in the transfer of technology from research institutions, much of the empirical research is just as unclear as the theory. Some studies report that strengthening patents leads to more R&D, and thus more innovation. Others conclude patent protection and the pace of research are, at best, tenuously related.

But the empirical literature on intellectual property rights does yield three concrete lessons. First, the institutional setting in which research is conducted plays a pivotal role. Studies that fail to give significant weight to organizational structures and legal environments are bound to be seriously flawed. Second, the old saw about garbage in-garbage out applies in spades to analyses of intellectual property rights: problems associated with underlying assumptions, measurement issues, and data errors loom large in this literature. Third, policymakers should be wary of putting much stock in any one study. The complex nature of the relationships between property rights, innovation, information diffusion, and economic growth are difficult to capture in a single analysis.

Abstract:
Broadband, or high-speed access to the Internet, has generated significant economic benefits. Certain regulations, however, are slowing investment and deterring entry into the broadband market. In this statement, we make two recommendations that would remedy these regulatory defects and thereby lower artificial barriers to competitive provision of broadband services.

Abstract:
To make prudent recommendations for improving the use of cost-benefit analysis in policy settings, some measures of how well it is actually done are essential. This paper develops new insights on the potential usefulness of government cost-benefit analysis by examining how it is actually performed.

We assess the quality of a particularly rich sample of cost-benefit analyses of federal regulations. The data set we use for assessing the quality of regulatory analysis is the largest assembled to date for this purpose. The 55 analyses we examine span the Reagan administration, the first Bush administration and the Clinton administration. The paper is the first to assess systematically how government cost-benefit analysis has changed over time.

There are three key findings. First, a significant percentage of the analyses in all three administrations do not provide some very basic economic information, such as information on net benefits and policy alternatives. For example, over 70 percent of the analyses in the sample failed to provide any quantitative information on net benefits. Second, there is no clear trend in the quality of cost-benefit analysis across administrations. Third, there is a great deal of variation in the quality of individual cost-benefit analyses.

cost-benefit analysis, federal regulations, regulatory analysis

Abstract:
Over the coming decades, the increasingly popular "precautionary principle" is likely to have a significant impact on policies all over the world. Applying this principle could lead to dramatic changes in decision making. Possible applications include climate change, genetically modified food, nuclear power, homeland security, new drug therapies, and even war.

We argue that the precautionary principle does not help individuals or nations make difficult choices in a non-arbitrary way. Taken seriously, it can be paralyzing, providing no direction at all. In contrast, balancing costs against benefits can offer the foundation of a principled approach for making difficult decisions.

precautionary principle, decisions, non-arbitrary

Abstract:
Many people are concerned that information about their private life is more readily available and more easily captured on the Internet as compared to offline technologies. Specific concerns include unwanted email, credit card fraud, identity theft, and harassment.

This paper analyzes key issues surrounding the protection of online privacy. It makes three important contributions: First, it provides the most comprehensive assessment to date of the estimated benefits and costs of regulating online privacy. Second, it provides the most comprehensive evaluation of legislation and legislative proposals in the U.S. aimed at protecting online privacy. Finally, it offers some policy prescriptions for the regulation of online privacy and suggests areas for future research.

After analyzing the current debate on online privacy and assessing the potential costs and benefits of proposed regulations, our specific recommendations concerning the government's involvement in protecting online privacy include the following:

* The government should fund research that evaluates the effectiveness of existing privacy legislation before considering new regulations.

* The government should not generally regulate matters of privacy differently based on whether an issue arises online or offline.

* The government should not require a Web site to provide notification of its privacy policy because the vast majority of commercial U.S.-based Web sites already do so.

* The government should distinguish between how it regulates the use and dissemination of highly sensitive information, such as certain health records or Social Security numbers, versus more general information, such as consumer name and purchasing habits.

* The government should not require companies to provide consumers broad access to the personal information that is collected online for marketing purposes because the benefits do not appear to be significant and the costs could be quite high.

* The government should make it easier for the public to obtain information on online privacy and the tools available for consumers to protect their own privacy.

The message of this paper is not that online privacy should be unregulated, but rather that policy makers should think through their options carefully, weighing the likely costs and benefits of each proposal.

Abstract:
The recent sharp increase in the price of oil has generated renewed interest in U.S. oil exploration and development. This paper examines the likely impact of developing new energy resources on oil and gasoline prices. In addition, we use a benefit-cost framework to analyze the impact of allowing oil drilling in the Arctic National Wildlife Refuge and the portions of the Outer Continental Shelf that are currently closed to development. We find that development of ANWR and off-limits OCS is likely to have only a modest impact on future world (and thus domestic) oil prices, on the order of one percent. Therefore, we believe that the impact of opening the new resource areas on current prices would be modest as well. Our benefit-cost analysis of developing off-limits OCS suggests that the benefits are very likely to exceed the costs. We are less confident in the case of ANWR, but still believe that the expected benefits of development are likely to exceed the costs. We suggest an alternative way of framing the issue of resource development that may give both policy makers and the public a better sense of the tradeoffs involved.

Abstract:
We investigate a central issue in the climate change debate associated with the Kyoto Protocol: the likely performance of international greenhouse gas trading mechanisms. Virtually all design studies and many projections of the costs of meeting the Kyoto targets have assumed that an international trading program can be established that minimizes the costs of meeting overall goals. This conclusion rests on several simplifying assumptions. We focus on one important issue that has received little, if any, attention: the interaction between an international trading regime and a heterogeneous set of domestic greenhouse policy instruments. This is an important issue because the Protocol explicitly provides for domestic sovereignty regarding instrument choice, and because it is unlikely that most countries will choose tradeable permits as their primary domestic vehicle.

It is true that costs can be minimized if all countries use domestic tradeable permit systems to meet their national targets (allocate permits to private parties) and allow for international trades. But when some countries use non trading approaches such as greenhouse-gas taxes or fixed quantity standards ? which seems likely in the light of previous experience ? cost minimization is hardly assured. In these cases, achieving the potential cost savings of international trading will require some form of project-by-project credit program, such as joint implementation. But theory and experience with such credit programs suggest that they are much less likely to facilitate major cost savings, because of large transactions costs, likely government participation, and absence of a well functioning market. Thus, individual nations' choices of domestic policy instruments to meet the Kyoto targets can limit substantially the cost-saving potential of an international trading program. There is an important trade-off between the degree of domestic sovereignty and the degree of cost effectiveness. Moreover, there is a need to analyze the likely cost-savings from feasible, as opposed to idealized, international policy approaches to reducing emissions of greenhouse gases.

Abstract:
Ever since the first general-purpose charge card debuted in the early 1950s, pundits have been predicting the cashless society. Over fifty years later, we may finally be getting close to that vision. This study is the first to examine empirically the move toward a cashless society using a cost-benefit framework. We find that when all key parties to a transaction are considered and benefits are added, cash and checks are more costly than many earlier studies suggest. In general, the shift toward a cashless society appears to be a beneficial one.

cashless society, cost-benefit

Abstract:
This paper examines the economic impact of regulation in industrial and developing countries. It argues that economic analysis can play an important role in restructuring regulated industries and developing more effective regulations, and in reducing politically driven regulation and capture.

The past two decades have seen an unparalleled rise in new health, safety, and environmental regulations in industrial countries. At the same time, in some countries there has been substantial economic deregulation of several industries (including airlines, railroads, trucking, energy, telecommunications, and financialmarkets).

Developing countries are engaged in deregulating some sectors of the economy and devising new regulatory frameworks for others. After reviewing the literature, Guasch and Hahn provide an overview of the costs and benefits of regulation throughout the world, highlight the potential gains from reform of regulation and deregulation in both industrial and developing countries, draw lessons from experience with government regulation, and suggest how to improve regulation in developing countries.

They find that it is possible to explore systematically the costs and benefits of regulatory activities using standard economic analysis. They conclude that regulation - especially regulation aimed at controlling prices and entry into markets that would otherwise be workably competitive - can limit growth and significantly reduce economic welfare.

Although unnecessary process regulation can hurt the economy, social regulations may significantly benefit the average consumer. But some regulations do not meet goals effectively and may sometimes reduce living standards.

Developing countries can consider several regulatory policies, tools, and frameworks to improve their approach to regulation. What they choose will depend on available administrative expertise and resources, as well as political constraints and economic impacts. Generally, local and national capabilities for evaluating regulation need to be improved.

Regulation is not generally undesirable, but it often has undesirable economic consequences, which result in part from political forces to redistribute wealth. These forces need can be mitigated by more sharply evaluating the consequences and tradeoffs of proposed regulations.

This paper - a joint product of the Office of the Chief Economist and Senior Vice President, Development Economics and the Advisory Group, Latin America and the Caribbean Technical Department - was produced as a background paper for World Development Report 1997 on the role of the state in a changing world.

Abstract:
As economists, we believe that the Second Circuit's ruling, by not allowing the consideration of important information about the relationships between the benefits and costs of alternatives, is economically unsound. In particular, we believe that, as a general principle, regulators cannot make rational decisions unless they are allowed to compare costs and benefits and to use the results, along with other factors as appropriate, to choose among alternatives.

To the extent permissible under the statute and case law, EPA should be allowed to consider benefits and costs in establishing rules for implementing s316(b). The Court's allowing EPA to consider benefits and costs would improve both the decision making process - by making it more transparent - and the regulatory decisions by allowing important relevant information to be considered explicitly.

Abstract:
All with a stake or interest in the case against Microsoft, brought by the Justice Department and several state Attorneys General, should recognize the importance of the potential costs of this action, some of them not at all obvious. Regardless of the legal niceties or even some of the theoretical economics involved, the great danger is that the proposed remedies for Microsoft's dominant position in the market for computer operating systems will be worse than the disease.

The remedies will likely create new and different problems, with the result that consumers, far from benefiting from the end of the Microsoft monopoly, would instead suffer harm. Although it is not often openly discussed, the aim of the antitrust case is a form of government regulation of the operating systems market, presumably to make it more competitive. Government regulation in a market characterized by rapid change and innovation is fraught with danger, particularly in the form of reduced incentives to innovate.

For example, when Microsoft was integrating Windows with MS-DOS during an earlier state of the Antitrust Division investigation of Microsoft, Novell, the marketer of the competing system DR-DOS, complained to the Justice Department. If Justice had forced Microsoft to carry DR-DOS in Windows, the result would have been a reduction in Microsoft's incentive to innovate because it would have been required to share the benefits with another manufacturer. Since the consumer benefits more than producers from innovation in a market like this, such an outcome would have had potentially serious adverse impacts on consumers and on society as a whole.

Another hidden cost of the antitrust case is already evident. Political rent-seeking is becoming more prominent - that is, the leading players have increased the use of hired lobbyists and political contributions in an attempt to gain political advantage in the struggle. For example, Microsoft rose from 16th in the 1992 election cycle to first in the 1996 cycle in a ranking of companies that donate money to political parties or individual politicians.

The Federal government's case against IBM, abandoned after thirteen years, is illustrative of the dangers of trying to regulate in a dynamic market like computers. Like Microsoft, IBM was accused of illegally leveraging its dominant position through various practices that erected entry barriers against competitors. By the time the whole costly exercise was over, however, IBM was no longer dominant.

Quantifying the costs and benefits of the Justice Department's proposed remedies in the Microsoft case is difficult, particularly when there is no logical endpoint to the government's intervention. But, regulatory history--especially in dynamic markets - teaches that the regulatory costs of the Microsoft case are likely to be significant.

Abstract:
Governments throughout the world are requiring greater use of economic analysis as a way of informing key policy decisions. The European Union now requires that an impact assessment be done for all major policy initiatives. An evaluation of the EU system could provide lessons for the U.S. and determine whether the EU is allocating resources for analysis efficiently.

This paper provides a comprehensive analysis of the use of impact assessment in the European Union since its inception, using the largest available dataset. We score these assessments using a number of objective measures of quality, such as whether a particular assessment provides information on costs, benefits, or alternatives. In addition, we provide the first empirical evaluation of the EU principle of proportionate analysis, which calls for the application of more rigorous analytical standards to important policy initiatives.

In general, we find that recent EU impact assessments include more economic information, but many important items are still missing. We also provide evidence that the quality of EU impact assessment increases with the expected cost of the proposal, which is consistent with the proportionality principle. Furthermore, while we find that the average quality of EU assessments lags behind U.S. assessments, we cannot reject the hypothesis that the analysis done for important initiatives in the EU is of similar quality to the analysis done in the U.S. Finally, we offer concrete suggestions on how the EU and U.S. might improve their evaluation processes by learning from each other.

European Union, impact assessments

Abstract:
Ethanol production in the United States has been steadily growing and is expected to continue growing. Many politicians see increased ethanol use as a way to promote environmental goals, such are reducing greenhouse gas emissions, and energy security goals. This paper analyzes the economic and political issues surrounding the ethanol industry. It provides a cost-benefit analysis of substantially increasing ethanol production, and finds that costs are likely to exceed benefits by about three billion dollars annually in 2012 if current policies continue. It also suggests that earlier attempts aimed at promoting ethanol would have likely failed a benefit-cost test.

The paper then identifies key issues that will affect future ethanol support and suggests how politics could affect the development of sensible energy and climate policies in general. Finally, the paper offers some suggestions for more cost-effective development of energy alternatives that would enhance energy security and environmental quality.

Abstract:
For over two decades, federal agencies have been required to analyze the benefits and costs of significant regulatory actions and to show that the benefits justify the costs. But the regulatory state continues to suffer from significant problems, including poor priority-setting, unintended adverse side-effects, and, on occasion, high costs for low benefits. In many cases, agencies do not offer an adequate account of either costs or benefits, and hence the commitment to cost-benefit balancing is not implemented in practice. A major current task is to ensure a deeper and wider commitment to cost-benefit analysis, properly understood. We explain how this task might be accomplished and offer a proposed executive order that would move regulation in better directions. In the course of the discussion, we explore a number of pertinent issues, including the defects of the record of the last two decades, the "precautionary principle," the value of "prompt letters," the role of distributional factors, and the need to incorporate independent agencies within the system of cost-benefit balancing.

cost-benefit analysis, regulation, administrative law

Abstract:
This paper assesses the policy response to the use of cellular phones while driving from a legal, economic and political perspective. We argue that there is a fundamental disconnect between law and policy analysis. The disconnect arises largely because the political process is more responsive to the public's perception of risk than the scientists' risk assessments and the economists' policy analyses. Consequently, lawmakers are advocating both inefficient and ineffective regulatory options while ignoring important aspects of the problem. If cell phones represented an isolated example, there would be little cause for concern. Unfortunately, the problem is more general and therefore demands that policy makers consider new institutions for addressing potential biases in decision making. We examine possible explanations for the disconnect between law and policy analysis, and suggest some lessons about the design of institutions for addressing complex regulatory issues.

Disconnect Between Law and Policy Analysis, Cell Phones, Case Study

Abstract:
This study provides the most comprehensive evaluation of the quality of recent economic analyses that agencies conduct before finalizing major regulations. We construct a new dataset that includes analyses of forty-eight major health, safety, and environmental regulations from mid-1996 to mid-1999. This dataset provides detailed information on a variety of issues, including an agency's treatment of benefits, costs, net benefits, discounting, and uncertainty.

We use this dataset to assess the quality of recent economic analyses and to determine the extent to which they are consistent with President Clinton's Executive Order 12866 and the benefit-cost guidelines issued by the Office of Management and Budget (OMB).

We find that economic analyses prepared by regulatory agencies typically do not provide enough information to make decisions that will maximize the efficiency or effectiveness of a rule. Agencies quantified net benefits for only 29 percent of the rules. Agencies failed to discuss alternatives in 27 percent of the rules and quantified costs and benefits of alternatives in only 31 percent of the rules. Our findings strongly suggest that agencies generally failed to comply with the executive order and adhere to the OMB guidelines. We offer specific suggestions for improving the quality of analysis and the transparency of the regulatory process, including writing clear executive summaries, making analyses available on the Internet, providing more careful consideration of alternatives to a regulation, and estimating net benefits of a regulation when data on costs and benefits are provided.

Abstract:
A quarter century ago, there was a very influential paper that shaped thinking on how best to design what we now call the Internet. The article offered a design principle called "end-to-end." The idea was to keep the inner part of a computer network as simple as possible and allow the "intelligence" to reside at the edges of the network closer to the end user.

Proponents of this grand design have pushed for net neutrality legislation, which would discourage access providers from placing any intelligence in the inner part of the network. Their ideal of a "dumb network" would be achieved by preventing access providers from charging content providers for prioritized delivery and other quality enhancements made possible by placing intelligence at the center of the network.

This essay examines the merits of the end-to-end argument as it relates to the net neutrality debate. First, we review the evidence on the current status of the Internet, concluding that all bits of information are not treated equally from an economic standpoint. Second, we demonstrate that because consumers and business place a premium on speed and reliability for certain kinds of Internet services, network owners and specialized service providers have responded with customized offerings. Third, we consider our findings in the context of the current legislative proposals involving net neutrality. Fourth, we consider some of the problems with regulating prices and quality of service, which is essentially what the net neutrality proponents propose. Our principle conclusions are that the end-to-end principle does not make sense from an economic perspective and that further regulation of the Internet is not warranted at this point in time.

internet, net neutrality

Abstract:
The International Trade Commission (ITC) has gained importance in recent years because of its increasingly powerful role in adjudicating patent disputes. That little-known independent agency has the authority to bar importation of articles found to infringe a valid U.S. patent by issuing "exclusion orders." The Commission is now potentially the patent tribunal of first instance for electronic products and other products manufactured overseas. This paper examines possible biases in ITC decision making in favor of patent holders from both a positive and a normative perspective and offers suggestions for improving the efficiency of the ITC process for adjudicating complaints based on patent infringement. I provide the most comprehensive economic analysis to date of cases that arise under Section 337 of the Tariff Act of 1930.

This paper has three objectives. The first is to assess the purported benefits of the ITC's 337 process. I find that these benefits are small. The second is to assess the ITC's costs. In particular, I have sought to detect and measure any potential bias at the ITC in favor of complainants who seek to exclude allegedly infringing imported products. I find evidence of two types of bias. First, there is some evidence that the ITC is more likely to find infringement than are district courts - that is, the ITC appears to be more likely than are district courts to find an accused infringer to be liable. Second, a subtle yet important bias in favor of complainants relates to the ITC's practice of granting nearly automatic injunctive relief once it has found infringement. Yet as the Supreme Court has recently recognized, awarding nearly automatic injunctive relief in patent cases is not always in the public interest. Finally, I propose either removing jurisdiction from the ITC in most patent cases or imposing the same standard for issuing injunctions as applies in the district courts as two possible methods of reform that would reduce the social costs of ITC patent litigation.

International Trade Commission, ITC, Section 337, patents, injunctive relief, patent litigation

Abstract:
Many scholars assert that "cap and trade" is an appropriate strategy for addressing climate change. Some economists have argued that auctions of greenhouse gases should be an integral part of any cap-and-trade mechanism. These economists suggest that auctions can efficiently distribute emissions allowances among firms, and potentially offset some of the dead weight costs with raising government revenues. Many environmentalists argue that revenue from auctions should be used by the government to promote reductions in greenhouse gas emissions. Similar arguments are made for greenhouse gas taxes.

This paper evaluates various arguments for auctions and taxes in light of political realities. I argue that economists are likely to be overly optimistic in their support for auctions and taxes, and that many potential uses of these revenues are unlikely to result in economic benefits. I then offer some general guidance for governments on the role of auctions in a cap-and-trade mechanism and offer recommendations for participating firms. Specifically, I urge the government to compare a realistic set of policy options, while recognizing that the feasibility of different types of mechanisms can change over time. To illustrate one such comparison, I examine auctions and taxes as ways of raising revenue, and find that neither is likely to do particularly well in terms of efficiency based on history. Furthermore, I suggest that the introduction of political economy considerations may lead to an optimal level of pollution control that is lower than that suggested by conventional economic analysis.

Auctions, Environmental Economics, Climate Change, Benefit-Cost Analysis, Regulation, Political Economy

Abstract:
Cell phone use is increasing worldwide, leading to a concern that cell phone use while driving increases accidents. Several countries, as well as two states and many municipalities in the U.S., have banned the use of hand-held cell phones while driving. In this paper, we develop a new approach for estimating the relationship between cell phone use while driving and accidents. Our approach is the first to allow for the direct estimation of the impact of a cell phone ban while driving. It is based on new survey data from over 7,000 individuals.

This paper differs from previous research in two significant ways: first, we use a larger sample of individual-level data; and second, we test for selection effects, such as whether drivers who use cell phones are inherently less safe drivers, even when not on the phone.

The paper has three key findings. First, there is evidence of selection effects. Our analysis suggests that individuals who are more likely to use hands-free devices are more careful drivers even without them. Once we correct for the endogeneity of hands-free usage, our models predict no statistically significant reduction in accidents from mandating that usage must be hands-free. Second, we find that the impact of minutes of cell phone use on accidents varies across the population. Even after controlling for observed driver characteristics, our random coefficient models show there is additional variation in the cell phone impacts on accidents, particularly for female drivers. Previous studies of cell phone usage and accident risk are thus subject to selection bias. We calculate that previous estimates of the impact of cell phone usage on risk for the population may be overstated by 36%. Finally, we explore the impact of a ban on cell phone use while driving. We cannot reject the hypothesis that a ban would have no effect on the number of accidents. Our estimates of the reduction in accidents from a ban on cell phone use while driving are both lower and less certain than previous studies indicate.

hand-held cell phones, driving, ban, impact

Abstract:
This essay examines the economics of "net neutrality" and broadband Internet access. We argue that mandating net neutrality would be likely to reduce economic welfare. Instead, the government should focus on creating competition in the broadband market by liberalizing more spectrum and reducing entry barriers created by certain local regulations. In cases where a broadband provider can exercise market power the government should use its antitrust enforcement authority to police anticompetitive behavior.

net neutrality, broadband, government

Abstract:
In February, the European Competition Commission fined Microsoft $1.35 billion in what was just the latest in a long line of antitrust cases against the company. Ironically, though, whatever market power Microsoft possessed was already ebbing by the time the company became mired in legal battles with regulators over which software applications could be bundled with operating systems. The real story here is the ever-briefer period in which companies with clear leads in technology and marketing seem able to sustain the advantages. Treating Microsoft, Google, and their successors like the monopolists of yore would be a real loss to advanced industrial economies, which are increasingly dependent on rapid technological change to sustain growth. As a consequence, antitrust policy built around traditional tests of market power are at best a way to keep lawyers well remunerated and, more likely, a significant barrier to productive change.

Abstract:
Because of the overwhelming, positive response to the iPhone as compared to other smart phones, exclusive agreements between handset makers and wireless carriers have come under increasing scrutiny by regulators and lawmakers. In this paper, we document the myriad revolutions that have occurred in the mobile handset market over the past twenty years. Although casual observers have often claimed that a particular innovation was here to stay, they commonly are proven wrong by unforeseen developments in this fast-changing marketplace. We argue that exclusive agreements can play an important role in helping to ensure that another must-have device will soon come along that will supplant the iPhone, and generate large benefits for consumers. These agreements, which encourage risk taking, increase choice, and frequently lower prices, should be applauded by the government. In contrast, government regulation that would require forced sharing of a successful break-through technology is likely to stifle innovation and hurt consumer welfare.

Abstract:
Fifteen scholars on auctions and telecommunications regulation urge the FCC to cancel bids made in, or permit winning bidders to opt out of, the reauction of the NextWave licenses in Auction 35.

For auctions to function efficiently, buyers and sellers must follow basic rules, including the rule that a seller deliver in a timely manner what the winning bidder has purchased. This rule has not been applied in Auction 35. The FCC auctioned something that it did not have - immediate access to the spectrum for the winning bidders. Thus, if the FCC forces the winning bidders to pay, they will sue the agency for forcing them to pay for something that they did not receive. Alternatively, their shareholders will sue the companies. Meanwhile, wireless carriers have invested in less efficient technologies to meet capacity needs.

The FCC has said that its current policy toward Auction 35 seeks to "protect the integrity" of the spectrum auction process. The opposite is already occurring. The FCC increases uncertainty in the wireless market if it holds carriers accountable for winning bids for licenses that the agency cannot deliver. Bidders will discount their future bids accordingly, and auction revenues will fall. That outcome does not benefit consumers, taxpayers, workers, or shareholders.

Abstract:
A group of economists and scientists met at Stanford University on October 18, 2008 to discuss the role of research and development in developing effective policies for addressing the adverse potential consequences of climate change. We believe that climate change is a serious issue that governments need to address. We also believe that it is vitally important that research and development be made a central part of governments' strategies for responding to this challenge.

Abstract:
Information markets are markets for contracts that yield payments based on the outcomeof an uncertain future event, such as a presidential election. The prices in these markets provide useful information about a particular issue, such as a president's reelection probability. The purpose of this paper is to suggest how the use of information markets can improve the quality of public policy.

Our central contribution is to propose an efficient way to implement well-informed policy decisions. We do this by linking and building upon the literatures on information markets and mechanism design. Our claim is that the prices in information markets can inform the mechanism design process, thereby making previously infeasible mechanisms feasible for the policy maker. Specifically, information markets make pay-for-performance contracts viable in the policy domain. Although we focus on public sector decision making, the analysis is sufficiently general to apply to a wide range of problems in private sector and not-for-profit decision making. The framework can be applied to any situation in which a decision maker has the resources, but not the necessary information and ability, to achieve his specified objective. First, we show how it is generally possible to design contracts based on different contingencies whose prices will convey useful information on the costs and benefits of a number of policy choices, ranging from regulation to public works projects. Second, we describe one way of providing incentives for self-interested agents to implement policies that maximize net social benefits. Third, we show how information markets can be used to provide a stronger foundation for implementing a variety of government oversight mechanisms, such as a regulatory budget. We also show how legislators can use traditional budgetary controls in conjunction with information markets to exercise more effective oversight.

Finally, we identify and analyze the strengths and limitations of using information markets to help improve policy. To make the analysis concrete, we examine how the Copenhagen Consensus - which makes recommendations on spending $50 billion wisely - could have benefited from applying information markets.

We argue that there is a large scope for expanding the use of information markets. These markets could promote greater transparency in governmental decision making, provide more accurate estimates of the efficiency and distributional impacts of different policies, provide a better understanding of uncertainties, help with sensitivity analysis, offer a low-cost way of assessing new policy proposals, finance government projects and regulations with positive net benefits, allow those affected by specific policies the opportunity to hedge risk, and aid in the design of policies. Furthermore, information markets can help assess the value of additional research on the decision to undertake a project. At the same time, we suggest that there are important limits to the application of information markets. We also suggest how government could play an important role in the expansion of information markets and researchers could help in the development and assessment of these markets.

Information markets, policy decisions, efficiency

Abstract:
E-commerce has experienced tremendous growth over the past few years. Nonetheless, senators, privacy watchdog groups, and the Federal Trade Commission have argued that e-commerce is being held back by consumer worries about online privacy and security. Some privacy advocates are calling for additional regulations specifically new online privacy rules aimed at providing consumers with more information and customer choice. And Congress has tried to answer that call most recently with a bill introduced by Senator Ernest Hollings. This essay examines the case for more government regulation and argues that the advocates have overstated their case. While some consumers, particularly older Americans and those new to the Internet, are clearly concerned about online privacy and security, these issues do not appear any more urgent for online shopping than offline shopping. Nor do these issues emerge as significant deterrents to e-commerce. Indeed, it is not even clear that any e-commerce has been deterred. Absent evidence of a significant market failure, the case for further government intervention is weak at best.

E-commerce, Government Regulation

Abstract:
Barack Obama and John McCain have staked out very different positions on serious questions involving economic regulation, everything from housing finance to alternative energy mandates, but practical considerations will dissolve many of these differences.

Abstract:
This testimony reviews research from the Joint Center on regulatory impact analyses and provides five recommendations for improving the regulatory process. These recommendations include: making regulatory impact analyses publicly available on the Internet; providing a regulatory impact summary table for each regulatory impact analysis that includes information on costs, benefits, technical information, and whether the regulation is likely to pass a benefit-cost test; establishing an agency or office outside the executive branch to assess independently existing and proposed federal rules' requiring that the head of a regulatory agency balance the benefits and costs of a proposed regulation; and requiring that all regulatory agencies adhere to established principles of economic analysis when doing a regulatory impact analysis.

Abstract:
We review major developments in national environmental policy during the Clinton Administration, defining environmental policy to include not only the statutes, regulations, and policies associated with reducing pollution, but also major issues of public lands management and species preservation. We adopt economic criteria for policy assessment - principally efficiency, cost-effectiveness, and distributional equity. While the paper is primarily descriptive, we highlight a set of themes that emerge in the economics of national environmental policy over the past decade.

Business and Government Policy, Economics - Microeconomics, Environment and Natural Resources, Political Science, Regulation

Abstract:
In this report, we reply to the comments of Andzeg Skrzypacz and Robert Wilson on behalf of Frontline Wireless in the Federal Communications Commission's 700 MHz Auction proceeding. Frontline's economists primarily advocate two restrictions on the auction that would significantly limit the number of bidders for the E Block license, one of several blocks for sale in the auction. One restriction would exclude all incumbent wireless operators and cable operators from participating in the E Block auction. A second restriction would require that the winning bidder employ a wholesale-only business model.

We examine the likely costs and benefits of these two restrictions in some detail. We argue that the benefits of these restrictions would likely fall short of the costs, so they should not be adopted. In performing our cost-benefit analysis, we point out that Skrzypacz and Wilson failed to consider the unintended consequences of recent efforts to restrict entry in U.S. wireless auctions (the NextWave story) and to impose mandatory open access obligations on U.S. wireline operators (the CLEC story).

To justify their first restriction, Frontline's economists assert that the only motivation for the incumbents' participation in the E Block would be to foreclose other wireless entrants. We explain that there are procompetitive reasons for the incumbent carriers to participate in the E Block auction. We also explain that Frontline's economists have failed to demonstrate that incumbent carriers have both the ability and incentive to warehouse spectrum.

To justify their second restriction, Frontline's economists assert that the wireless industry's market structure is inefficient due to "vertical integration" of incumbent carriers across wholesale and retail functions. According to Skrzypacz and Wilson, Frontline's proposed wholesale-only restriction would permit the wireless industry to evolve into an allegedly more efficient state of structural separation, as incumbent carriers would be forced to embrace a wholesale business model. We demonstrate that the authors fail to present a compelling case as to why their proposed business model would likely result in benefits in excess of costs.

We explain that the proposed restrictions on the auction would likely insulate firms, such as Frontline, from competition in the auction. Such insulation may result in a windfall for Frontline, but it is unlikely to be in the best interests of the American consumer. The FCC should send a clear signal to industry participants that it rejects any form of rent-seeking behavior by rejecting Frontline's proposal.

Frontline, 700 MHz, auction, spectrum, FCC

Abstract:
For over two decades, federal agencies have been required to analyze the benefits and costs of significant regulatory actions and to show that the benefits justify the costs. But the regulatory state continues to suffer from significant problems, including poor priority-setting, unintended adverse side-effects, and, on occasion, high costs for low benefits. In many cases, agencies do not offer an adequate account of either costs or benefits, and hence the commitment to cost-benefit balancing is not implemented in practice. A major current task is to ensure a deeper and wider commitment to cost-benefit analysis, properly understood. We explain how this task might be accomplished and offer a proposed executive order that would move regulation in better directions. In the course of the discussion, we explore a number of pertinent issues, including the actual record of the last two decades, the precautionary principle, the value of prompt letters the role of distributional factors, and the need to incorporate independent agencies within the system of cost-benefit balancing.

Abstract:
This note analyzes a paper that has been used to support opposition to the European Proposed Directive on software patentability. The paper, by James Bessen and Robert Hunt analyzes software patents and research and development (R&D). They conclude that software patents have become "cheaper" than other patents and that software patents substitute for R&D spending. The authors argue that firms primarily use software patents strategically.

The data, analytical methods, and empirical results, however, do not support these conclusions. In this note we explain in detail the problems in the paper and how those problems prevent one from drawing any firm conclusions. Our critique is based on a concern that this unpublished manuscript will unduly influence policy decisions and is not intended to diminish the importance of the questions the authors address. We therefore conclude the note with recommendations for future research.

Abstract:
This paper reviews the US and European experiences with regulatory oversight and the use of formal tools to analyze regulation. We conclude that the US and Europe have made some progress in improving regulatory analysis and oversight, but they can do much more.

We offer six recommendations for improving the quality and transparency of regulatory oversight and analysis: three recommendations for the United States and three for Europe. For the US, we suggest that: 1) The Office of Management and Budget (OMB) apply its in-house expertise to evaluate the costs and benefits of regulations; 2) Congress pass a law requiring that all federal regulatory agencies submit annual cost and benefit estimates of major regulations to OMB; and 3) OMB issue a scorecard assessing the overall quality of regulation and ask the agencies to complete a scorecard for each major regulation.

For Europe, we suggest that: 1) The European Union (EU) pass a directive specifying that the primary objective of regulation is to maximize net benefits; 2) The EU create a strong centralized regulatory oversight unit to help evaluate regulatory proposals; and 3) The EU, as well as each member state, create a structure that is balanced, which promotes efficient regulation and discourages inefficient or ineffective regulation.

regulatory benefits and costs, U.S., Europe

Abstract:
Like the Federal government, many states are increasingly conscious of the burdens, as well as the benefits, of government regulations. This paper provides a comprehensive assessment of state efforts to eliminate or change burdensome or foolish regulations and to use economic analysis to produce more sensible results. While the approaches differ widely and no generalizations are possible, it is clear that the results have been mixed at best. A number of states claim that improvements in the regulatory process have brought about more effective and less costly regulations, but the analytical support for such claims is often weak. The paper contains a full-scale account of state regulatory reform activities and an assessment of results achieved in four states with particularly ambitious programs of regulatory reform - California, New York, Florida, and Virginia. In general, the review of state reform efforts reveals that efforts are most effective when there is a strong, well-funded, central oversight mechanism with active political support, and when review requirements are clear and provide agencies with specific guidelines. Until significant resources and political support are devoted to reform efforts, however, real-world progress in regulatory reform is not likely to be great.

Abstract:
Benefit-cost analysis is required for many regulatory decisions in the United States and many other countries. In this paper, I examine a standard textbook model that is used in benefit-cost analysis as it is actually applied. My primary objective is to suggest how including other key factors in the analysis could promote the development of smarter regulation.

I begin by presenting a standard economic model for government intervention in markets, which balances benefits and a narrow definition of costs. I then introduce a richer normative theory that considers several political and economic factors that are frequently not considered in analyzing real-world applications. Examples include costs associated with rent seeking, design and implementation, and raising revenues. The richer theory suggests that the government should supply less of a good, or ask the private sector to provide less of that good, than the standard economic model suggests. The reason is that intervening in markets is often more costly than the standard model assumes. In special cases, the theory provides guidance on the setting of socially optimal taxes and subsidies. I then explore how the theory needs to be modified in the presence of biased estimates of benefits and costs. I conclude with a discussion of how the theoretical framework can be applied to the actual design of regulatory policy.

benefit-cost analysis, public choice, political economy, public finance, implementation analysis

Abstract:
Economists have long recognized that certainty of contract is essential to a healthy economy. Long-term forward contracts, in particular, help reduce financial risk. Those contracts can only accomplish that goal, however, if parties know the contracts will be enforced.

From an economic and policy standpoint, long-term energy contracts should be abrogated only in truly exceptional circumstances. The mere fact that a price seems too high in retrospect does not justify abrogating contracts voluntarily agreed to by sophisticated buyers and sellers. Nor do generalized claims of - market dysfunction - at the time the contract was formed.

Abstract:
A minimal test of the desirability of regulations is that they further their primary objectives. In some cases, regulations designed to reduce health, safety, and environmental risks can actually increase risk, especially when such regulations lead to significant reductions in private expenditures on life-saving investments. This monograph assesses the mortality implications of the costs of a group of twenty-four federal health, safety, and environmental regulations.

We find that an unintended increase in risk is likely to result from the majority of regulations examined here. A more positive result is that aggregate mortality risk falls for the entire set of regulations, primarily because a few regulations yield large reductions in risk.

We believe that such analysis can help to highlight the potential problems with inefficient regulation and can serve as a useful complement to other forms of analysis, such as benefit-cost analysis. Specifically, we believe that an assessment of the mortality implications of regulatory costs can and should be used to help identify those regulations whose primary purpose is to save lives but that may have the unintended consequence of actually increasing mortality. In such perverse cases, Congress and the regulatory agencies should seriously consider alternatives that would yield higher levels of economic welfare and save more lives.

Abstract:
The Federal Communications Commission has requested comments on the regulation of voice telephone services delivered over the Internet, dubbed "VoIP" or Voice over Internet Protocol. This paper examines whether there is a need to regulate VoIP. We conclude that there is no economic rationale for regulating VoIP and that consumers will likely be worse off if VoIP is regulated. Furthermore, the emergence of new technologies, such as VoIP, is rapidly eroding the rationale for continuing to regulate local telephone services.

Voice over Internet Protocol, VoIP, FCC

Abstract:
With Wall Street still reeling from the mortgage meltdown, the Federal Reserve now seemingly committed to rescuing big investment banks "too complex to fail," and the U.S. Treasury proposing a top-to-bottom reorganization of financial regulation, pieties about the virtues of unfettered markets now seem hollow. Tighter oversight of financial markets, reversing a trend that began in the 1970s with the end of fixed commissions on the U.S. stock exchanges, is thus almost certainly in the cards.

However, a little perspective is in order: re-regulation could have unintended consequences, bolstering the power of well-organized interest groups, reducing access to capital and undermining America's competitive position in the huge and growing global market for financial services. Hence the wisdom in pausing to remember both how easy it is to fall into bad regulation, and how hard it is to dig out.

Abstract:
Several legal scholars are highly skeptical of the use of cost-benefit analysis and other economic tools in regulatory decision making. Recently, these critics have focused on debunking economic summaries of regulatory activity - sometimes referred to as regulatory scorecards. The critics generally offer arguments that would support less quantitative economic analysis of regulations.

This paper addresses the analytical concerns raised by the critics. It makes the following four points: first, summary measures of the impacts of regulation have made important contributions to our understanding of the regulatory process - a point often overlooked by the critics; second, some of the suggestions made by the critics are legitimate, but many are not; third, some of the critics' concerns could be addressed by making refinements to the work that they find so objectionable; and finally, the solution to legitimate concerns raised by the critics is not to eliminate quantitative economic analysis, but to gain a deeper understanding of its strengths and weaknesses, and to use it wisely.

Abstract:
After two years of litigation, the Department of Justice (DOJ) and the 19 states suing Microsoft have proposed draconian remedies (Plaintiffs Proposed Final Judgment 2000, hereafter, PPFJ) to address the violations of the Sherman Act found by Judge Thomas Penfield Jackson (Conclusions of Law 2000). The centerpiece of the proposal - breaking Microsoft into two companies, with one owning the operating systems and the other with applications and everything else - bears virtually no relationship to the anticompetitive acts found by Judge Jackson. It is based on new reasoning offered by Plaintiffs' economic experts, none of whom testified during the liability phase. Moreover, the underlying logic conflicts with the theories used to find Microsoft liable.

This paper analyzes the likely consequences of the proposed remedy. In addition, the author considers a remedy offered by Robert Litan and William Nordhaus - a remedy that would split rights to Microsoft's operating systems among three separate companies, in addition to breaking off applications. The next section provides a framework for analysis and a brief review of the evidence of consumer harm. The author then reviews the DOJ remedy and the proposal by Litan, Noll, Nordhaus and Scherer (Litan et al. 2000, Litan and Nordhaus 2000). Finally, concluding remarks are offered.

Abstract:
The late housing boom, in which borrowers largely forgot that prices can go down as well as up, attracted some unsavory brokers and left many consumers facing foreclosure. The Fed is under great pressure to triangulate between Congressional Democrats' desire for New Deal-style regulation and the Bush Administration's opposition to anything labeled consumer protection. While the Fed may be giving too little consideration to the potential costs in attempting to rid the mortgage market of ill-advised loans, the regulations do look reasonable.

Abstract:
High-speed access to the Internet, or broadband, could be a tremendous boon to economic growth. In March 2004, the Bush administration made rapid deployment of broadband a national priority. The president asserted, We ought to have universal, affordable access to broadband technology by the year 2007. As state and national policies develop in response to this vision, it is important for policymakers to understand the costs and benefits of different approaches aimed at promoting the diffusion of higher-speed Internet connections.

Over the past few years, the broadband market has grown dramatically: The number of subscribers has increased by nearly 300 percent since 2000, prices have declined, and the speed of some services has increased. Nonetheless, there is room for further growth and improvement. Public policies can greatly affect how this market develops - for better or worse. The choices policymakers have before them include taxes and subsidies, incentives and price controls.

Policies should focus on the incentives for broadband suppliers to invest in network upgrades that extend service and improve quality and speed. State and federal regulators can help increase broadband penetration by eliminating any regulation of wholesale and retail prices and any policies that deter entry into these markets. Subsidies, meanwhile, should not generally be used to promote universal broadband service. They are likely to hurt the average consumer. If subsidies are required for political reasons, they should be offered only as one-time inducements to extend broadband into underserved areas. Likewise, a tax on access to broadband or on services delivered over broadband, such as Internet telephony, is likely to slow the spread of broadband and is also an economically wasteful way of raising revenues. Internet access or applications, therefore, should not be taxed. In short, the right set of policies will foster competition among suppliers and lower barriers to entry to the benefit of consumers in terms of both access and prices. Poor policy choices, on the other hand, though intended to improve access to broadband, could have the just the opposite effect.

broadband, universal, March 2004, Bush

Abstract:
As we understand it, the D.C. Circuit did not allow the EPA to consider the costs of complying with ozone and PM NAAQS. As we further understand it, this legal ruling can be overturned only by this Court. As economists, we believe that the D.C. Circuit's ruling not allowing the EPA to consider important information relating to the consequences of its regulatory actions is economically unsound. Without delving into the legal aspects of the case, we present below why we think the Court should allow the EPA to consider costs in setting standards. In particular, we believe that, as a general principle, regulators should be allowed to consider explicitly the full consequences of their regulatory decisions. These consequences include the regulation's benefits, costs, and any other relevant factors.

EPA, D.C. Circuit, regulatory actions

Abstract:
There is widespread agreement that climate change is a serious problem. If nations fail to regulate greenhouse gases that contribute to global warming, or use alternative strategies for addressing the problem, the damages could be significant, and perhaps catastrophic. In this essay, I argue that the range of effective options to address this problem is likely to be quite limited for the foreseeable future. The reason is that national leaders appear to lack the political will to achieve global emission reductions in a timely manner.

This observation does not mean that we should do nothing. It does mean that we should focus on what is likely to be sensible and doable. I argue that it makes little sense to try to bring all countries into a binding international agreement to reduce emissions at this time, because such agreements are not likely to be workable. It makes sense, instead, for interested countries to take some action now to limit greenhouse gas emissions, including putting a price on emissions. It also makes sense to focus on research and development - including how best to adapt to climate change, improve our understanding of geoengineering, and improve the cost effectiveness of carbon capture and storage for coal burning power plants. In addition, countries should continue to experiment with institutions that will be needed to manage a portfolio of solutions for addressing climate change over the longer term. I also note the absence of key political leadership in this area and suggest what is needed.

Benefit-Cost Analysis, Regulation, Environmental Economics, Energy Policy, International Conflicts, Negotiations, Sanctions

Abstract:
Consumers and producers frequently rely on product ratings, such as college rankings, restaurant reviews and bond ratings. While much has been written about the structure of ratings in particular industries, little has been written on the general structure of different ratings industries and whether government intervention is typically needed. This paper begins that inquiry by examining the market structure of different ratings industries, and considering the circumstances under which firms that provide ratings should be regulated. The issue is particularly timely in light of recent calls to rethink the regulation of media ratings and credit ratings.

We find that ratings firms in different industries share several common features. For example, most ratings firms operate in highly concentrated markets. Some factors that could make ratings markets more concentrated include economies of scale, benefits from having a single standard, and general agreement on what should be measured. We also find that most ratings firms determine their own testing standards and methods, although some industries have self-governing oversight bodies that offer their own accreditation standards. While the government regulates firm entry for a few ratings industries, this is relatively rare. The vast majority of ratings firms are unregulated.

We analyze the question of regulation using an economic framework that focuses on the viability and effectiveness of a proposed policy. Despite the finding that many ratings industries are concentrated, our analysis suggests that market forces generally appear to be an effective mechanism for providing consumers and producers with useful ratings. In most cases, such markets do not require government intervention. Moreover, in industries characterized by rapid technological change the government is likely to do more harm than good by intervening. As an alternative to government regulation, voluntary industry oversight bodies may be effective in improving communication between the parties and in improving transparency in rating procedures.

product ratings, rating industries, market forces

Abstract:
In this essay, I address the problem of conflicts of interest in the context of funded research and opinions that are disseminated to the public by academics, think tanks, and individuals affiliated with think tanks. I argue that full disclosure; may be a laudable goal, but is likely to be a disaster in practice. In addition, I argue that some disclosure norms imposed by the media are not likely to be very helpful in promoting useful information for their audiences, and will likely have unintended adverse consequences.

There are no simple solutions to the problem of identifying conflicts of interest and potential biases associated with research and opinions reported in the media. I believe the problem could constructively be addressed by honing the thinking skills of the media and the public - not something that is likely to happen immediately because the demand isn't there.

Abstract:
In the aftermath of Katrina, Robert Hahn asks whether and how New Orleans should be rebuilt.

Katrina, reconstruction, New Orleans

Abstract:
Information markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as a presidential election. They have the potential to improve decision making and policies throughout the economy.

The demand for information markets appears to be increasing. At the same time, there are regulatory hurdles to establishing such markets, largely arising from state prohibitions on Internet gambling. This paper reviews the current regulatory structure for information markets in the United States and offers recommendations for reform.

We make two points: first, the authority for regulating many information markets should be shifted from the states to the federal government. Second, the federal government should implement a clear policy that would allow a large number of information market contracts.

We argue that the Commodities Futures Trading Commission should regulate certain kinds of information market contracts that are futures contracts. Particular contracts should satisfy an economic purpose test administered by the CFTC. That test should consider whether an information market contract would allow for significant financial hedging or improve economic decisions. In addition, some types of information markets, such as over-the-counter markets, should remain exempt from CFTC regulation altogether. We believe that the effect of our proposal would be to enhance the development of information markets that improve economic decision making.

Abstract:
This paper examines arguments for and against the centralization of regulation,using the wireless communications industry as a case study. Several factors suggest that the burden increasingly ought to fall on proponents of decentralization. Scale, scope and network efficiencies are growing in many markets, raising the potential costs of balkanization. And rapid technological change strains the expertise of under-funded, under-skilled local regulators. At the same time, one must be careful not to assume that skilled regulators will necessarily do the right thing. The political context in which regulators operate is often decisive.
With wireless we expect that more efficient outcomes are far more likely with federal than state regulation. We do not believe, however, there is a simple way to generalize about the level of government best suited to regulating from an economic efficiency standpoint. The most that theory can offer here is a disciplined way of thinking about the issue.

Federalism, regulation, free market, Commerce Clause, economic efficiency, market failures, decentralization, market incentives, social cost

Abstract:
Regulation of the use of cellular phones by individuals while driving is now commonplace outside the United States and has been proposed in a number of jurisdictions in the United States. There is growing concern that using cellular phones while driving leads to increases in accidents and fatalities. This paper provides an economic analysis of regulatory options for addressing cellular phone usage by drivers of vehicles. While large uncertainties surrounding both benefits and costs exist, a key conclusion is that banning drivers from using cellular phones is a bad idea. Our best estimate is that the costs of a ban are likely to exceed benefits by more than $20 billion annually. Less intrusive regulation, such as requiring the use of a hands-free device that would allow a driver to use both hands for steering also is not likely to be economically justified.

We are doubtful that the net benefits from a ban on drivers' using hand-held phones or a mandate requiring the use of hands-free devices would be positive for three reasons. First, the results of our quantitative benefit-cost analysis suggest that costs are likely to exceed benefits. Second, our best estimates of accidents and fatality reductions do not take into account how drivers would alter their behavior in response to regulation. If regulations were enforced, drivers may simply switch to other risky behaviors. Thus, the net reductions in accidents and fatalities are likely to be overstated, which means the benefits of regulatory interventions could be quite small. Third, the technology is already moving in the direction of voice activation, which is likely to reduce risks.

Instead of regulating now, the federal government and the states should collect more systematic information on the relationship between cellular phone use by individuals while driving and accidents. Specifically, governments should attempt to improve estimates of the number of accidents and fatalities associated with cellular phone use. It is possible that accidents are underestimated now. Moreover, an argument can be made that accidents will increase more than linearly as more drivers use cellular phones in vehicles. The federal government should also assess the benefits and costs of introducing promising new technologies that could reduce the risks of accidents associated with drivers' using cellular phones in vehicles.

cellular phones, driving, individuals, accidents, fatalities

Abstract:
Mobile phone usage while driving is increasing throughout the world. In this paper, we use survey data from 7,268 U.S. drivers to estimate the relationship between mobile phone use while driving and accidents. We hypothesize that drivers who use mobile phones while driving may be more likely to get into accidents than drivers who do not, even when they are not using the phone. We find evidence for the endogeneity of mobile phone and hands-free device usage, and our analysis suggests that individuals who are more likely to use hands-free devices are more careful drivers even without them. Once we correct for the endogeneity of usage, our models predict no statistically significant increase in accidents from mobile phone usage, whether hand-held or hands-free. Our results call into question previous cost-benefit analyses of bans on mobile phone usage while driving, which typically assume that such bans will have a salutary effect.

mobile phones, driving, accidents

Abstract:
This paper provides the most comprehensive assessment to date of the costs and benefits of federal regulatory activities. The assessment, based on the government's own numbers, shows that the net benefits for final regulations promulgated from 1981 to mid-1996 approach a net present value of $1.6 trillion. The analysis also shows that the government can significantly increase the net benefits of regulation. Less than half of final regulations pass a neutral economist's benefit-cost test. Net benefits could increase by approximately $280 billion if agencies rejected such regulations. Net benefits could also increase if agencies replace existing regulations with more efficient alternatives, or if agencies substantially improve regulatory programs.

The efficiency of official regulations varies by agency and by the type of risk the regulation is designed to reduce. Regulations from the Department of Transportation comprise over half of the total net benefits of final regulations, although they account for less than 10% of all regulations. The net benefits of regulations from the Environmental Protection Agency account for only a third of total net benefits, primarily because of 19 Clean Air Act regulations with high net benefits, although two-thirds of all regulations are EPA regulations. On average, regulations that reduce cancer risk are less efficient than other social regulations, and EPA cancer regulations appear less efficient than other cancer regulations. Regulations that reduce the risk of car, fire, or work-related accidents are generally more efficient than regulations that reduce the risk of cancer and heart disease. The study also shows that the efficiency of regulations ha not declined over time, as some scholars suggest. Furthermore, the introduction of formal regulatory oversight by the OMB does not appear to influence the cost-effectiveness of regulations.

The paper shows that agency compliance with regulatory impact analysis requirements in Reagan's Executive Order 12291 and Clinton's Executive Order 12866, the basis for agency estimates of the costs and benefits or regulation, is usually superficial. As a result, the quality of such analyses is generally poor. Partly because of the poor quality of analyses, it appears that agencies do not often use the analyses to improve regulatory outcomes. If Congress and the White House are serious about regulatory reform, they must cooperate to enforce the regulatory impact analyses requirement. Successful enforcement requires high-level political support, statutory language requiring all agencies to adhere to established principles of economic analysis, and rigorous review of agency analyses by an independent entity. At this time, it is unclear whether law makes are willing to exert the political muscle necessary to achieve real reform.

costs and benefits, regulations, regulatory activities, present value, diminishing marginal returns, regulatory, executive order 12291, executive order 12866

Abstract:
Security in software networks relies on technology, law, and economics. As the cost of software security breaches becomes more apparent, there has been greater interest in developing and implementing solutions for different parts of the problem.

In this paper, we provide the first comprehensive assessment of the software security issue that uses a law and economics framework. We begin by offering a definition of software security that illustrates the complexity of the problem. We then review and critique the literature assessing the costs of software security. Finally, we evaluate a number of legal, economic and technical approaches for addressing security problems.

security, software networks, technology, law, economics

Abstract:
This paper provides an economic analysis of the residential real estate brokerage industry. We find that the traditional model for residential real estate brokerage services may be dated, and could be improved substantially with some public policy interventions that spur innovation.

We believe that there are numerous barriers to entry that are slowing the emergence of new models for serving consumers. Some of these barriers are likely to be anti-competitive. Examples include discrimination against new brokerage models and online brokers who wish to join multiple listing services; state legislation that would require minimum service requirements, effectively preventing a la carte offerings; and prohibitions by real estate commissions on providing rebates to customers. In our opinion, none of these practices should be allowed.

We offer three broad policy recommendations: First, federal and state antitrustauthorities should carefully scrutinize efforts to limit competition in the residential real estate brokerage market. Second, state governments should refrain from adopting laws or rules that inhibit competition in real estate brokerage. Third, Congress should allow the Federal Reserve Board and the Treasury Department to permit banks, which have long been natural potential entrants into this business, to offer residential real estate brokerage services through separately capitalized affiliates.

We do not know which business models are likely to succeed in the marketplace for residential real estate services in the future. We do believe, however, that judicious public policy interventions could have a marked impact on improving services and lowering costs for home buyers and sellers.

real estate, brokerage, residential, anti-competitive

Abstract:
People often make important decisions based on information elicited from experts with uncertain preferences. We provide a theoretical rationale for the use of information markets in decision making tasks. Specifically, we show that markets for claims on decision-relevant variables can be efficient incentive schemes for eliciting information. Our model shows decision makers will subsidize liquidity in illiquid decision markets to gather valuable information. Our model also shows that the mere act of linking the decision to the market price will typically enhance liquidity in the market. Overall, our results highlight the potential for using information markets in diverse decision making tasks.

information markets, decision markets

Abstract:
This paper offers a new approach to economic development, which we call performance-based policy. The basic idea is to get better information to implement better development decisions. The approach combines the use of information markets with payments for performance.

An information market is a market for a contract that yields a payment based on the outcome of an uncertain future event, such as the number of people infected by HIV in Africa in 2010. We show how these markets can provide real-time information on the likely benefits and costs of different development projects.

We argue that information markets combined with pay-for-performance contracts have the potential to revolutionize the way aid agencies, foundations, non-governmental organizations, and the private sector promote economic development. In addition to providing economic benefits, performance-based policy could lead to greater accountability and transparency in economic development. Despite its great potential, the approach has some limitations, particularly in information markets with little trading activity.

Economic development, information markets, development decisions

Abstract:
The linkLine price squeeze case pending in the Supreme Court for the Fall 2008 Term is one of the most significant antitrust cases on monopolization law that the Court has taken in years. Amici are professors and scholars in law and economics who have taught, or have conducted research on, antitrust law and the economics of industrial organization. They are William J. Baumol, Robert H. Bork, Robert W. Crandall, George Daly, Harold Demsetz, Jeffrey A. Eisenach, Kenneth G. Elzinga, Richard A. Epstein, Gerald Faulhaber, Franklin M. Fisher, Charles J. Goetz, Robert Hahn, Jerry A. Hausman, Keith N. Hylton, Thomas M. Jorde, Robert E. Litan, Paul W. MacAvoy, Sam Peltzman, J. Gregory Sidak, Pablo T. Spiller, and Daniel F. Spulber.

We agree with the petitioners that the Ninth Circuit has generated an inescapable conflict among circuits, and that its opinion is incompatible with the Supreme Court's decisions in Trinko, Weyerhaeuser, and Brooke Group. We agree with Judge Gould's dissent from the Ninth Circuit's decision in linkLine that Trinko "takes the issues of wholesale pricing out of the case," such that the plaintiffs' only possible remaining theory of harm would be predatory pricing at the retail level - which the plaintiffs did not allege. We also agree with Judge Ginsburg's opinion for the D.C. Circuit in Covad Communications Co. v. Bell Atlantic Corp., which in turn embraces the conclusion of the Areeda-Hovenkamp treatise that "it makes no sense to prohibit a predatory price squeeze in circumstances where the integrated monopolist is free to refuse to deal." The existence of a rule like linkLine has a pervasive impact on business behavior that, at the margin, affects competition and consumers. This deleterious effect extends beyond the telecommunications industry to affect all firms that do business in the Ninth Circuit. These reasons justify reversing the Ninth Circuit's decision.

In our minds, an even larger reason than those described above makes it imperative that the Court reverse this decision. The Ninth Circuit's decision in linkLine implicates the normative foundation of modern Sherman Act jurisprudence: that antitrust law exists to advance consumer welfare. We have three points to make.

First, any rule of price-squeeze liability that threatens liability based on the claim that the difference between a firm's upstream and downstream prices leaves downstream rivals insufficient margin substitutes a rule of competitor welfare for consumer welfare.

Second, properly understood, a price squeeze is a regulatory issue, which makes sense only as a rule of price regulation in an industry already subject to duties to deal and to control by institutionally competent regulators. Attempting to implement regulatory policy through section 2 of the Sherman Act is ill-advised, both because it makes no sense for courts to re-regulate deregulated or lightly regulated industries, and because courts lack the institutional competence to implement regulation.

Third, the Ninth Circuit's rule is of pressing concern precisely because it will deter efficiency-enhancing conduct and competitive pricing. Vertical integration and partial integration are ubiquitous, and firms need to be able to make decisions about such integration without the threat of liability. Vertically integrated firms likewise need to be free to cut retail prices (as long as the prices are not predatory) without concern for rivals - the point of Brooke Group. Moreover, the Ninth Circuit's standard is so vague and open-ended that it creates uncertainty and invites litigation; it also permits imposition of liability based on apparently subjective evaluation of disputed and hard-to-prove facts, which will lead to a substantial risk of false positives.

Abstract:
M2Z Networks, Inc. and its consulting economist, Professor Simon Wilkie, have asked the Federal Communications Commission (FCC), when allocating the third block of the Advanced Wireless Services (AWS) spectrum, to abandon the agency's established auction process and instead award that spectrum directly to M2Z. They argue that the FCC should embrace M2Z's business plan because, relative to some alternative use of the spectrum that would emerge from an unrestricted auction, M2Z's plan would generate significant benefits for broadband consumers. These putative benefits include (1) providing a basic, "free" mobile broadband service to new subscribers, and (2) reducing the price of broadband for existing subscribers. If, contrary to M2Z's proposal, the FCC does auction the AWS-3 spectrum, M2Z urges the FCC to impose requirements on the winning bidder that mirror M2Z's business plan. This paper analyzes the benefits and costs of M2Z's proposal by comparing it with an allocation based on an unrestricted auction of spectrum rights. We find that M2Z's proposal would likely cause substantial economic losses in both static and dynamic economic efficiency.

Abstract:
This paper critically reviews the draft of the Office of Management and Budget's third report on the benefits and costs of federal regulation. The purpose of this analysis is to offer constructive recommendations for improving that report. We conclude that that report represents a small improvement over the second report. There is, however, room for even more progress. We suggest that OMB make greater use of its in-house expertise to refine estimates of benefits and costs and that it place greater emphasis on those regulations that do not pass a benefit-cost test based on numbers provided by agencies themselves. Using agency numbers reported by OMB, we calculate that about ten recent regulations would not pass a strict benefit-cost test. The OMB should either suggest eliminating or reforming these regulations or explain why they should be kept in place. We also believe that OMB should assemble a scorecard that would assess and compare the quality of regulations and provide guidance on standardizing the content and summary of regulatory analyses. Such changes in presentation would make it easier for interested parties to understand the impacts of regulations and to determine agency compliance with legislation, executive orders, and OMB guidelines.

Abstract:
Injuries caused by workplace activities that involve repetitive motion, known as musculoskeletal disorders (MSDs), increasingly concern workers, employers, and regulators because of their frequency and high treatment costs. The Occupational Safety and Health Administration (OSHA) recently proposed a national rule designed to reduce the workplace risk of MSDs. OSHA estimates there were about 626,000 MSDs in 1997, representing about one-third of all serious nonfatal workplace injuries and illnesses. OSHA estimates the proposed rule will cost $4 billion per year and generate $9 billion per year in benefits. Yet, OSHA does not provide sufficient evidence that private markets are failing to reduce MSD risk without government intervention and does not convincingly demonstrate that the rule will result in more good than harm.

Unless OSHA effectively addresses some of the more serious flaws in the proposed rule, OSHA should not proceed with the final regulation. OSHA should more carefully evaluate the nature and extent of MSDs in the workplace than it did in the proposed rule and use improved economic analysis to target serious MSDs that employers can reduce at low cost. Furthermore, OSHA should include new provisions to improve employer access to information about reducing workplace risk of MSDs. The rule's ergonomics program requirements should apply only to those MSDs which employers do not have sufficient incentive to reduce without government intervention.

Abstract:
The U.S. Environmental Protection Agency recently proposed a rule that would reduce exposure to radon gas in air and drinking water. The radon rule is expected to be the first rule finalized under the Safe Drinking Water Act as amended in 1996 and could therefore set a precedent for future rules developed under the act. The purpose of this analysis is to evaluate the costs and benefits of the EPA's radon rule relative to alternative approaches of reducing risks from radon.

We find that the EPA's approach to regulating radon in drinking water cannot be justified on benefit-cost grounds by using the EPA's numbers. The EPA's numbers suggest that regulation of radon would result in total net benefits of about $250 million annually, but that the costs of regulating radon in drinking water would exceed the benefits by about $50 million annually. Unfortunately, the EPA failed to make that point, even though it had the data.

On the basis of the EPA's numbers, we develop a cost curve for reducing radon in drinking water and an estimate of possible benefits. Our analysis of the rule suggests that it is highly likely that the economic benefits of the EPA's proposed radon reductions in water are lower than the costs. Moreover, it is possible that the total benefits of the rule fall short of the costs. A targeted approach to removing radon from larger water systems might be justified on benefit-cost grounds, but the net benefits would be quite small.

We believe that it would be unwise to pass new federal regulations that require reductions in exposure to radon in drinking water. Instead, we prefer to address the problem of reducing radon exposure by providing useful information to citizens, as the states and the EPA are already doing. In addition, the EPA should disseminate information to drinking water systems on the likely benefits and costs of radon removal.

Abstract:
Although prices in financial markets play an important role in improving allocative efficiency in the real economy, few models of securities markets explicitly incorporate resource allocation decisions. In this paper, we study the equilibrium in a securities market when the market price provides valuable information that can improve allocative efficiency. We show that a decision maker will subsidize liquidity in an illiquid securities market to gather valuable information about her decision payoffs. We also show that a decision maker's liquidity subsidy improves expected social welfare by enhancing allocative efficiency, but does not induce the socially optimal level of information acquisition. Finally, we demonstrate that the mere act of linking the allocation decision to the market price will typically enhance liquidity in the securities market. Overall, our results highlight the potential of using securities markets for information to improve public and private decisions.

Liquidity, Prediction Markets, Information Markets, Subsidy

Abstract:
Will all federal regulations soon pass a benefit-cost test? If the OMB's 2003 report is any indicator, the answer may be yes - at least for some categories of regulations. Applying the midpoint of OMB's estimates for quantified costs and benefits of agency rules, we find that 100 percent of regulations studied would pass a benefit-cost test for several agencies, and about 80 percent would pass for all agencies considered. Moreover, these regulations would confer at least $100 billion annually in net benefits, again using OMB's numbers. Sound too good to be true? That's probably because it is.

We argue that OMB's numbers are plausible, given the methodology that OMB uses. Whether they are reasonable is less clear. Some work by economists on related sets of regulations suggests that the percentage could be lower. A survey of experts in the field also casts doubt on the estimates of the number of regulations that would pass a benefit-cost test derived from OMB's report. The experts also suggest, in line with academic research, that there is considerable room for improvement in regulations that pass a benefit-cost test. We conclude with several suggestions for improving the regulatory process.

OMB, 2003 report, cost-benefit

Abstract:
Information markets are markets for contracts that yield payments based on the outcome of an uncertain future event, such as a presidential election. They can provide real-time information on the likely benefits and costs of different kinds of policies and projects.

We argue that information markets combined with pay-for-performance contracts have the potential to revolutionize the way the government, the non-profit world, and the private sector do business. Moving to a performance-based policy paradigm could have great benefits for consumers and the economy. In addition to providing economic benefits, this approach could also promote greater accountability and transparency in the development of policy.

Abstract:
This paper evaluates a grand regulatory experiment - the first of its kind in the world - aimed at providing objective and comprehensive characterization of the costs and benefits of U.S. federal regulation as well as identifying opportunities for reform. This experiment, if successful, could have important implications for reviewing the impact of regulation across the world. Five government reports on the costs and benefits of regulation are now complete. We offer a critical evaluation of these reports, using an approach that scores the reports on various dimensions.

By and large, the reports represent a significant step forward in providing insights into the regulatory process and in providing information on the costs and benefits of regulation. But they also illustrate the shortcomings of having a government agency do the analysis.

We recommend that the Office of Management and Budget require agencies to issue a scorecard evaluating each agency regulation; that OMB summarize the strengths and weaknesses of regulations using this scorecard; that OMB include not only executive agencies, but also independent agencies in its analysis; and that Congress create an agency or office outside of the executive branch to perform a regulatory evaluation function similar to that of OMB. While we are highly critical of some aspects of these important reports, we are guardedly optimistic about their potential to improve regulation and the regulatory process.

costs and benefits, federal regulation, reporting, OMB

Abstract:
Regulation is playing an increasingly important role in the United States and world economies. In an attempt to improve the regulatory process, Congress passed a law aimed at having the government assess the economic impact of federal regulation. The Office of Management and Budget (OMB) has produced five final reports on the costs and benefits of federal regulation.

In this paper, we provide a comprehensive evaluation of these reports using objective measures. We conclude that OMB's annual reports represent a significant step forward in providing insights into the regulatory process as well as the costs and benefits of regulation. But a review of the reports also illustrates some of the problems with having a government agency do such an analysis. We offer several recommendations that address these problems, including increasing the use of scorecards that summarize the strengths and weaknesses of each agency regulation.

Regulations, regulation costs, benefits of regulations, federal regulation, regulatory agencies, regulatory impact analyses, regulatory reform, Office of Management and Budget, non-transfer rules, regulation

Abstract:
Not so long ago, $1 billion seemed worth worrying about - as Everett Dirksen, the late senator from Illinois, was supposed to have said, "A billion here, a billion there, and pretty soon you're talking real money." Today, another trillion-dollar commitment by the Federal Reserve makes headlines for only a day or two, and a projected federal budget deficit exceeding $1 trillion is widely viewed with equanimity. Are we courting disaster in this indifference to inconceivably large sums? Or have the extraordinary challenges faced by the economy today fundamentally altered the arithmetic of government finance? The answer is yes - and yes.

Abstract:
Several scholars have suggested that states should play a much more limited role in antitrust enforcement, especially in matters that are national or global in scope. In this paper, we analyze the states' part in the Microsoft case - a case that illustrates the costs of state intervention in antitrust matters that extend beyond state borders. Here, the states' involvement lengthened the lawsuit, complicated the settlement process, and increased both legal uncertainty and litigation costs. These results followed from the states' focus on parochial interests rather than broader concerns for efficiency and equity. We conclude that a state's antitrust enforcement authority should be restricted in matters that extend beyond its borders.

After analyzing the motivations for state behavior in federal antitrust, we consider whether restrictions should apply to federal antitrust authorities in cases with international implications. Though a global competition authority could, in principle, be designed to maximize economic well-being, practical and political obstacles appear to rule this option out, at least in the short term.

antitrust, federalism, states, enforcement

Abstract:
Economic analysis of life-saving investments in both the public and private sectors has the potential to dramatically improve longevity and the quality of life, but only if the analyses on which decisions are based are done well. In this article, we analyze a data set that provides information on the content and quality of journal articles that measure the cost-effectiveness of life-saving investments. Our study is the first to provide a detailed multivariate analysis of factors affecting objective measures of quality. We also explore whether a series of recommendations by an expert panel convened by the U.S. Public Health Service affect the way analyses of specific life-saving investments are done. Our results suggest that four factors are positively correlated with an index we construct to measure analytical quality: (1) having at least one author affiliated with a university, (2) publication in a journal that has experience in publishing these analyses, (3) if the life-saving investment is located in the United States, and (4) if the analysis considers a measure of social costs or benefits. Somewhat surprisingly, a study's funding source and whether it is affiliated with industry are not significantly correlated with the quality index. Finally, neither time nor the panel guidelines had an impact on the index.

Abstract:
Economic analysis of life-saving investments in both the public and private sectors has the potential to dramatically improve longevity and the quality of life, but only if the analyses on which decisions are based are done well. In this paper we analyze a dataset that provides information on the content and quality of journal articles that measure the cost-effectiveness of life-saving investments. Our study is the first to provide a detailed multivariate analysis of factors affecting objective measures of quality. We also explore whether a series of recommendations by an expert panel convened by the U.S. Public Health Service affect the way analyses of specific life-saving investments are done.

Our results suggest that four factors are positively correlated with an index we construct to measure analytical quality: 1) having at least one author affiliated with a university; 2) publication in a journal that has experience in publishing these analyses; 3) if the life-saving investment is located in the U.S.; and 4) if the analysis considers a measure of social costs or benefits. Somewhat surprisingly, a study's funding source and whether it is affiliated with industry are not significantly correlated with the quality index. Finally, neither time nor the panel guidelines had an impact on the index.

life-saving investments, economic analysis, U.S. Public Health Service

Abstract:
We know relatively little about the economic impacts of "minor" or "insignificant" rules because they are not typically analyzed. Yet, these rules could be important, particularly when we consider their aggregate impacts. We provide an economic analysis of one proposed rule to control hazardous air pollutants, which is not considered to be economically significant. This rule is of particular interest because it is likely to be the first in a long series of rules that EPA will use to address residual risk from hazardous air pollutants over the next several years. Our analysis suggests that the proposed controls that EPA considers are not likely to pass a benefit-cost test. We recommend that agencies consider applying a rule of thumb that would specify a threshold level of risk reduction that needs to be achieved before some kinds of regulation are considered. In addition, agencies should consider using lower quality cost-benefit analyses for problems in which the value of information is likely to be lower.

We believe that it is important to consider the impact of small rules more carefully at all levels of government. One way of addressing the problem would be to choose a list of small rules at random and examine their economic consequences. This research could provide insights into the potential economic importance of such rules. It could also provide information on how to utilize analysis and analytical resources more effectively to improve public policy.

rules, EPA, cost-benefit analysis

Abstract:
This article provided an overview of the costs and benefits of regulating mercury emissions from power plants using IQ gains as a measure of benefits. Our assessment suggests strongly that the benefits are not likely to be worth the costs. This is true both for the command-and-control regulatory regime that was proposed as well as the market-based regulatory regime that was ultimately adopted. However, the market-based approach could reduce the costs of achieving the emissions goal by about $15 billion.

Mercury, mercury emissions, mercury regulation, power plants, IQ gains, market-based approach

Abstract:
Does a State's regulatory scheme that permits in-state wineries directly to ship alcohol to consumers but restricts the ability of out-of-state wineries to do so violate the dormant Commerce Clause in light of Sec. 2 of the Twenty-first Amendment?

in-state, out-of-state, wineries, Commerce Clause

Abstract:
The U.S. Environmental Protection Agency recently finalized a rule that would reduce the maximum allowable level of arsenic in drinking water by 80 percent, from 50 micrograms per liter to 10 micrograms, by 2006. As soon as the rule was announced during the waning hours of the Clinton presidency, it became the topic of considerable debate as some experts argued that it is appropriate and necessary while others charged that its costs would far outweigh its benefits. The authors side with the latter group and argue that the costs may exceed the benefits by as much as $100 million annually.

Abstract:
Prominent in arguments opposing preemption of state tort law liability for alleged inadequacies in prescription drug labeling is the argument that such liability can complement FDA regulation by improving on a regulatory scheme that fails to provide adequate deterrence against the marketing of unsafe or inadequately labeled drugs. The premise of this argument is faulty. Fundamental principles of economics and numerous studies of FDA drug regulation reveal that FDA in fact errs on the side of overregulation of prescription drugs. Product liability litigation focused solely on one side of the prescription drug public health equation leads to further distortions of the drug approval and labeling process and exacerbates FDA's inherent overly cautious approach. Preemption of state tort law where it conflicts with FDA requirements will minimize these distortions and thereby maximize public health.

Abstract:
The signatories to this document are economists who have studied telecommunications, auctions, and competition policy. While we may disagree about the stimulus package, we believe that it is important to implement mechanisms that make stimulus spending as efficient as possible. To that end, we have come together to encourage the National Telecommunications Information Agency (NTIA) and Rural Utilities Service (RUS) to adopt auction mechanisms to allocate broadband stimulus grants.

The broadband stimulus NOI asks which mechanisms NTIA and RUS should use to distribute grants and how those mechanisms address shortcomings in traditional grant and loan programs. In this note we explain why procurement auctions are more efficient and more consistent with the stimulus goals of allocating funds quickly than a traditional grant review process. We recommend that NTIA/RUS use procurement auctions to distribute at least part of the stimulus funds.

The American Recovery and Reinvestment Act (ARRA) requires NTIA/RUS to distribute $7.2 billion in broadband subsidies. The broadband component of the Act has dual, and not entirely consistent, objectives of providing immediate economic stimulus and improving broadband service. NTIA/RUS faces a formidable challenge in determining how to spend the money quickly and efficiently in ways that meet these goals. The traditional grant application process is long, complicated, and involves subjective and arbitrary decisions regarding which projects to fund. In other words, requesting and reviewing grant applications is not an effective way to implement the plan.

Procurement auctions, in contrast, provide a mechanism that can allocate grant money quickly, efficiently, and according to well-defined rules. As a result, procurement auctions offer NTIA/RUS the most promising method of maximizing broadband improvement while also creating some level of “temporary, timely, and targeted” stimulus. We therefore strongly recommend that NTIA/RUS adopt procurement auctions as its preferred method of distributing grants.

This memo has three parts. First, it explains why the traditional grant application process is unsuitable for this task and why procurement auctions are better suited. Second, it sketches out a procurement auction plan. This plan is intended to be a starting point from which auction design experts would proceed to build and implement a fully functional auction. Finally, we explain that even if policymakers are skeptical of procurement auctions, one could be implemented quickly as part of an initial tranche of stimulus funding in order to test its efficacy relative to traditional approaches. This approach would allow NTIA/RUS to quickly expand upon or modify the procurement auction program in subsequent funding rounds.

Abstract:
Can open source software - software that is usually available without charge and that individuals are free to modify - survive against the fierce competition of proprietary software, such as Microsoft Windows? Should the government intervene on its behalf? This book addresses a host of issues raised by the rapid growth of open source software, including government subsidies for research and development, government procurement policy, and patent and copyright policy. Contributors offer diverse perspectives on a phenomenon that has become a lightning rod for controversy in the field of information technology.

Abstract:
Antitrust law is intended to protect consumer welfare and foster competition. At first glance, however, it is often unclear whether certain business practices have positive or detrimental effects. Some activities that appear anticompetitive can actually prove beneficial to consumers. In Antitrust Policy and Vertical Restraints leading law and economics scholars take a hard look at how vertical restraints limit the conditions under which firms may purchase, sell, or resell a good or service. Vertical restraints can be defined as any arrangement between firms operating at different levels of the manufacturing or distribution chain that restricts the conditions under which such firms may purchase, sell, or resell. Business tying and bundling practices, as one example, often come under scrutiny for depriving consumers of choice and driving up prices. In practice, however, bundling can lower costs and increase convenience. In order to formulate efficient policy, we must be able to identify and limit those practices that are likely to do more harm than good. It is critical that policymakers and analysts know which vertical restraints are likely to harm consumers more than they benefit competition. The authors, representing both sides of the debate over tying practices, provide a broad and informed perspective on this important issue.

antitrust policy

Abstract:
This paper responds to the U.S. Federal Communications Commission’s request for guidance in designing a national broadband plan. We argue that the U.S. market for Internet services is working well overall, as evidenced by nearly ubiquitous coverage, rapid adoption, large investments, and increasing speeds. Still, the market is not working well for all people in all places, and we offer a framework for considering policies intended to mitigate those issues.

The core of the paper consists of nine recommendations. Two of our recommendations are general. First, the government should ensure that its interventions do more good than harm. Second, the government should define clear, measurable, goals that do not benefit particular firms, technologies, or regions.

The remaining seven recommendations provide specific guidance for a U.S. broadband plan. They include: liberalizing spectrum, gathering and analyzing data on broadband demand, targeting resources to where they are most needed, defining broadband access to maximize social gain, designing mechanisms that will achieve the government’s broadband goals at the lowest social cost, vigorous antitrust enforcement, and designing policies to facilitate rigorous evaluation.

broadband