Is Cost-Benefit Analysis Neutral?

Abstract:     
Cost-benefit analysis (CBA) owes much of its appeal to its image as a neutral principle for deciding upon the appropriate stringency of environmental, health, and safety regulation. This article examines whether CBA is neutral in effect, i.e. whether it sometimes makes regulations more stringent or regularly leads to weaker health, safety and environmental protection. It also addresses the question of whether CBA offers either an objective value-neutral method or procedural neutrality.

This Article shows that CBA has almost always proven anti-environmental in practice and that, in many ways, it is anti-environmental in theory. It examines the practice of the Bush Administration using a representative data set and shows that Office of Management and Budget review produced numerous anti-environmental, health, and safety changes and no pro-protection changes in the rules in the data set. It also reviews "prompt letters," which CBA proponents cite as examples of CBA producing more regulation, rather than less. These letters have never prompted any fresh regulatory action and rarely have any basis in CBA. Finally, this article shows that the anecdotal information relied upon to show that CBA sometimes has strengthened rules prior to the Bush Administration provides little or no support for the view that CBA has a neutral effect.

The most common legal formulation of a cost-benefit test, that the costs should not exceed the benefits of regulation, acts a one-way ratchet, demanding that some regulations become less stringent, but never demanding greater protection of health, safety, or the environment. Nevertheless, one can discern some reasons why some analysts look at CBA as neutral in the apparent even-handedness of the optimality criterion, which has more influence in the academy than in practice. Even this criterion, however, does not act neutrally relative to all existing alternative criteria. Furthermore, the value choices in choosing methods for quantifying benefits make objective value neutral CBA a theoretical impossibility.

Keywords: cost-benefit analysis, regulatory reform, environmental law, regulation, administrative law, OMB, optimality

JEL Classifications: D61, D62, D63, D73, D78, I18, K23

Working Paper Series