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Market Failure and Government Intervention

of cost effectiveness analysis called an objective-cost study which would match different cost levels with the amount of objective that could be achieved.  For example EPA would match cleanup expenditures with the amount of a pollutant which would be cleaned up.  Of course, the burden was placed on decision makers to weigh how valuable a given amount of pollution abatement would be.  They promptly failed that test when they used the same weight reduction standards for very different chemicals!

Within days of the beginning of the Reagan administration Executive Order 12291 was issued which required regulatory impact analyses (RIAs) for regulations costing more than $100 million.  This order established net social benefit as the criterion for deciding whether or not to regulate.  While cost-benefit analysis was at the core of RIAs, the RIAs were required to analyze the shortcomings of the cost-benefit analyses.  The effect of RIAs was to slow down the ability of agencies to impose new regulations without extensive analysis.  Furthermore, since such analyses were expensive- the average cost of an RIA at EPA was $685,000- the RIAs ate heavily into agency budgets and limited agency actions.

With more state and local government agencies under severe budget limitations, fiscal impact analysis became a widely used tool for analyzing the desirability of projects.  A government unit would undertake a project if it promised more revenues than costs.  Implicitly government revenues (in other words, costs to the public) were viewed as benefits while government costs (in other words, benefits to the public) were undesirable.  Such a misleading objective should provide no basis for comparing projects, but only for testing if a single project exceeds a rigid governmental budget constraint.  Furthermore, if revenues exceed costs on a project, such projects would likely be ones that the market would itself undertake, instead of the government.

Table 17-4 summarizes the studies that have just been introduced.   Without question, new varieties of studies will evolve.  While cost benefit analysis takes into account all costs and benefits incurred by anyone, the other studies focus more narrowly on particular costs or benefits to be analyzed, as shown in Table 17-4.  For example, economic impact analysis and closure analysis focuses on the costs of the regulated without weighing the benefits of a regulation.  By contrast, regulatory impact analysis can be even more general than cost benefit analysis by taking into account many non quantifiable considerations that must be weighed against costs and benefits.  Cost Effectiveness Analysis is particularly useful when there are a limited number of objectives which cannot necessarily be given a dollar value.  As long as an objective can be quantified in some way, cost effectiveness analysis can measure how much of the objective is achieved per unit of cost and allows different methods for achieving the objectives to be compared.  Fiscal Impact Analysis is typically used by government agencies to examine the budgetary impact of its policies on the government agency itself.

Figure 17-8.  Government Studies  

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