Monday, July 27, 2009

Feasibility Analysis: Ambiguous and Diffused Costs

Many environmentalists are uncomfortable with cost-benefit analysis (CBA). CBA undeniably has a number of technical problems. I have argued, for example, that analysts should, in some cases, account for altruistic preferences; others have argued that analysts should ignore immoral preferences and existence values. One main reason many people oppose CBA, however, is that it often justifies allowing pollution and natural resource consumption, as long as the benefits of the risk-producing or consumption activity outweigh the costs.

Thus, a number of policy makers have proposed alternative decision procedures. Feasibility analysis is one that has recently gained traction. Feasibility analysis instructs policy makers to reduce specific pollutants within an industry to the minimum feasible levels, given technological and economic constraints.

University of Chicago law professors Eric Posner and Jonathan Masur recently provided a critique of feasibility analysis, criticizing its vagueness and its potential to cause disbursed harm to consumers:

The problem is there is considerably ambiguity throughout the process. . . . Feasibility analysis, as noted, tends to focus heavily on concentrated harms like plant closings. It pays little to no attention to the harms regulation may impose on consumers. From a welfarist standpoint, this blindspot in feasibility analysis is difficult to justify. That's an example of where feasibility analysis leads to overregulation compared to the socially optimal result, but Posner and Masur stress that feasibility analysis can lead to underregulation as well, particularly of smaller and/or less profitable companies or industries, which would face proportionally higher costs at complying with socially optimal regulation.

Posner and Masur further contend that, because of the ambiguity in feasibility analysis (for example, are automobiles and airplanes in the same industry?) agencies often resort to an informal CBA:

[A]gencies undertaking feasibility analysis seem to smuggle in some cost-benefit analysis on the side . . .

This result is unsurprising to me, since, on an intuitive level, CBA seems to correspond with how people make actual decisions. Before deciding to write this post, I did a quick determination of whether the benefits outweigh the costs. So if bureaucrats don't receive clear directions on how to choose among policy options, it seems likely that they will resort to CBA.

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