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 / Spring 2008 / Issue 50(originally published by Booz & Company)


The Myth of Cost-Benefit Analysis

The process also helped resolve a thorny risk question for a 1993 EPA water regulation in a way that satisfied regulators and technical experts from various fields, as well as the people who were to be affected by the decision. As detailed in Understanding Risk, the EPA turned to negotiation because its water experts already knew that the ordinary rule-making process would be contentious and therefore probably futile.

Two noteworthy components were part of the deliberation process. First, the EPA hired an outside firm to determine who should be at the table, taking into account how their biases might affect the ability of the rest of the group to deliberate. And second, by the end of the process the committee had decided it still didn’t have enough data or evidence to make some of the most important decisions needed for a hard-and-fast regulation. So it proposed an “information collection rule,” which required large public water suppliers to regularly test source water and to take specific actions based on the results of these tests. This breakthrough compromise didn’t just create a legislated means by which to reduce scientific uncertainty over time. It also required uncertainty to be addressed as part of the process of protecting public health, instead of pretending that the uncertainties didn’t exist.

Meanwhile, all is not lost for conventional cost-benefit analysis. The newly formed Society for Benefit-Cost Analysis is assembling in an effort to help improve the tool by openly recognizing its limitations and expanding its use where appropriate. “One of our main goals is to help create a uniform set of best practices and standards,” says Richard Zerbe, a professor of public affairs and an adjunct law professor at the University of Washington. Funded by the MacArthur Foundation and the School of Public Affairs at the University of Washington, the society will hold its first formal meeting in June 2008.

Let’s hope they move quickly, and that regulators can be compelled to be amenable to their suggestions. The long-standing distrust of regulation in the U.S. has started to shift. Global competition, a growing fear of liability lawsuits, and tough state and local laws have inspired American businesses, for the first time in 15 years, to push for new federal regulations to address health, safety, and environmental concerns. If the worthiness of each of those new regulations is going to be judged by the same tainted cost-benefit analyses as have come before, competition and innovation will continue to suffer. Deploying more expansive cost and benefit methodology — before laws are passed and before products are put on the market — would not only restore integrity to the process of regulation, but would also have a salutary economic effect.

Reprint No. 08103

Author Profile:

Denise Caruso ([email protected]) is the executive director and chair of the Hybrid Vigor Institute, which supports cross- disciplinary inquiry and collaboration on science, technology, and social issues. The author of Intervention: Confronting the Real Risks of Genetic Engineering and Life on a Biotech Planet (Hybrid Vigor Press, 2006), she also writes regularly for the Sunday business section of the New York Times.
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