33 Pages Posted: 2 May 2013 Last revised: 17 Jun 2013
Date Written: May 1, 2013
Under existing Executive Orders, agencies are generally required to quantify both benefits and costs, and (to the extent permitted by law) to show that the former justify the latter. But when agencies lack relevant information, they cannot quantify certain benefits. If this is so, how should agencies decide whether and how to proceed? As a matter of actual practice, agencies often engage in “breakeven analysis,” by which they explore how high the nonquantifiable benefits would have to be in order for the benefits to justify the costs. Breakeven analysis is most useful when the agency is able to identity lower or upper bounds, either through point estimates or through an assessment of expected value. If lower and upper bounds are not readily available, agencies might be able to make progress by exploring comparison cases in which relevant values have already been assigned (such as for a statistical life). When agencies cannot identify lower or upper bounds, and when helpful comparisons are unavailable, breakeven analysis may not be a great deal more than a hunch or a conclusion, or perhaps (when agencies choose to proceed) a way of announcing a decision in favor of precaution. Even if so, breakeven analysis does have the virtues of helping to identify what information is missing, of specifying the conditions under which benefits would justify costs (“conditional justification”), and of explaining why some cases are especially hard. An understanding of breakeven analysis in regulatory policy has implications for how to approach nonquantifiable variables in many domains of public policy and ordinary life.
Keywords: Cost-benefit analysis, nonquantifiable benefits, human dignity
JEL Classification: D02, D73, D78, I18, K23
Suggested Citation: Suggested Citation