Week 8
Regulatory Policy and Regulatory Justice
- Historical Development of (US) Regulatory Policy -
Wiener and Alemanno pointed out regulation is typically justified as a way to correct market failures
(such as externalities (unintended side effects), information asymmetry, and market power abuses) as
well as to address social problems like discrimination.
However, regulation can create its own issues: high compliance costs, stifling innovation, encouraging rent-
seeking (where groups seek benefits through regulation), and sometimes serving narrow private interests instead
of the public good.
The lack of effective oversight can result in poorly designed regulations, regulatory capture (where regulators
serve special interests), and inefficiency. Oversight is necessary to ensure regulations are effective, efficient,
transparent, and accountable.
In response to the Great Depression, President Franklin Roosevelt’s New Deal P
introduced major regulatory reforms in the US. These reforms expanded fed- H
eral powers and created new procedures for regulatory agencies (notably, the A
⬇
1930s S
Administrative Procedure Act of 1946) to follow when seeking to introduce
(The New Deal)
new regulatory interventions. While these measures aimed to address eco- E
nomic crises, they also led to an unchecked proliferation of regulations, often
lacking proper assessment of their necessity or effectiveness. 1
Economic challenges like the OPEC oil crisis prompted waves of deregulation
and privatization, seeking to address inefficiencies and high costs associated
with earlier regulatory approaches.
⬇
1970s–1980s
(Deregulation) By the end of the 1970s, the regulatory system in the US was seen as dysfunc-
tional: regulations were often incoherent, costly, and ineffective. The process
had become politicized and stagnant.
President Jimmy Carter campaigned on regulatory reform and selective dereg-
ulation, aiming to reduce regulatory burdens and increase accountability.
Carter introduced cost-benefit analysis (CBA) as a tool for agencies to rational- P
ize regulations, not to resist them, but to ensure they were justified and effi- H
cient. A
S
Carter’s Executive Order 12044 required agencies to analyze the impact of
proposed regulations, make those analyses public, and adopt the least burden- E
some approaches, including market mechanisms instead of traditional com-
⬇
1977–1981 2
mand-and-control regulation.
(Carter Administration)
Carter also established cabinet-level oversight councils and supported legisla-
tion like the Regulatory Flexibility Act (requiring agencies to consider impacts
on small entities) and the Paperwork Reduction Act (creating the Office of In-
formation and Regulatory Affairs, OIRA).
Although Carter did not succeed in making regulatory analysis a permanent
legal requirement, his administration established principles for regulatory re-
form, especially the use of benefit-cost balancing, that became standard prac-
tice in later administrations.
, Reagan’s Executive Order 12291 (1981) required all major regulations to un-
dergo CBA and be submitted to Office of Information and Regulatory Affairs
(OIRA) (within the Office of Management and Budget in the White House) for
review, making CBA the substantive standard for agency decision-making.
This order centralized authority in OIRA, shifted the burden of proof to agen-
1981–1989 cies to demonstrate compliance with CBA standards, and allowed OIRA sub-
(Reagan Administra-
tion)
stantial control over agency actions.
⬇
OIRA could suspend or delay agency actions if the analysis was unsatisfactory,
and agencies could appeal to the Presidential Task Force on Regulatory Relief
or ultimately the president.
The Reagan program went further than previous efforts by explicitly requiring
CBA as a decision rule, centralizing compliance authority, and emphasizing
regulatory relief (reducing the number and burden of regulations).
President Clinton’s Executive Order 12,866 built on Reagan’s earlier order by
1993–2001 continuing the requirement for agencies to conduct CBA and submit their anal-
⬇
(Clinton Administra- yses to OIRA.
tion)
Clinton’s order introduced substantive and procedural reforms, especially
measures to make OIRA’s review process more transparent.
The economic boom of the 1990s led to a global focus on improving regulatory
quality and oversight. (aiming to address some of the limitations of CBA and
improve the overall effectiveness and legitimacy of regulatory policy)
Regulatory Impact Assessment (RIA) expanded from a narrow focus on costs
and deregulation to a comprehensive appraisal method that incorporates both
economic and non-economic considerations. This evolution was influenced by
the growing recognition that high-quality regulation requires clear problem
definition and the use of systematic decision-making tools like CBA and RIA to
determine whether regulation is warranted.
⬇
The OECD evaluates and shares best practices among member states, while the
EU’s "Better Regulation" policies aim to ensure regulation is proportionate, P
effective, and legitimate, addressing concerns about over-regulation. H
Supranational bodies like the World Bank, the EU (via the Mandelkern Report), A
1990s and the OECD have articulated standards for good regulation. According to S
(Global Regulatory
the OECD, regulation should: E
Policy)
Serve clearly identified policy goals and be effective in achieving them. 3
Have a sound legal and empirical basis.
Produce benefits that justify costs, considering economic, environmental,
and social effects, and the distribution of impacts across society.
Minimize costs and market distortions.
Promote innovation through market incentives and goal-based approaches.
Be clear, simple, and practical for users.
Be consistent with other regulations and policies.
, Be compatible with competition, trade, and investment principles at both
domestic and international levels.
After the 2008 Global Financial Crisis, there was a move towards reregulation to address the failures that con-
tributed to the crisis.
President Obama institutionalized regular reviews of existing regulations to
identify and revise or repeal rules that were outdated, ineffective, or unneces-
sarily burdensome.
The administration emphasized protecting public health and welfare while
2009–2017 promoting economic growth, innovation, and job creation. Obama’s regulatory
(Obama Administra- strategy sought to consider both the benefits and costs of regulation, expand- ⬇
tion) ing opportunities for public participation, simplifying rules, and ensuring regu-
lations were based on sound science.
Obama reaffirmed and modestly expanded requirements for RIAs, encouraging
agencies to use evidence and analysis for major rules and to apply these prin-
ciples to independent agencies as well.
OIRA's oversight role weakened, and CBA was manipulated to serve deregula-
tory goals.
Trump’s deregulatory agenda targeted regulations in sectors such as automo-
2017–2021 tive, hazardous pollutants, energy efficiency, and climate policy (e.g., the Clean
(Trump Administration) Power Plan). ⬋
Although CBA had been a bipartisan tool for assessing regulation, under Trump
it was used more strategically to justify deregulation, sometimes distorting its
traditional economic rationale.
Regulatory decision-making methodologies
1. Quantification Approach: CBA
CBA requires regulators to calculate and compare the costs and benefits of a proposed regulation, ap-
proving it only if the benefits exceed the costs.
Helping to decide whether or not to regulate, often at the lowest possible cost and with the greatest possible
benefit.
E.g., air quality regulation saves 20 lives annually. Each life is valued between $3 million and $7 million (a
common range for the value of a statistical life in regulatory analyses). Total mortality benefits:
20 × ($3M to $7M) = $60M to $140M
Reduced illness (morbidity) and improved air quality aesthetics add $40 million in benefits.
Total Benefits:
($60M to $140M) + $40M = $100M to $180M
Implementation costs total $200 million.
Net Benefits (Benefits – Costs):
($100M to $180M) − $200M = −$100M to −$20M
Both the lower and upper bounds of net benefits are negative, meaning costs outweigh benefits in all sce-
narios. Regulations typically require net benefits ≥ $0 to be justified under a strict CBA framework. If the
same regulation would cost $200 million, it would fail CBA.
Over recent decades, CBA has become a deeply embedded practice in many jurisdictions, either as a
, standalone methodology or as part of broader Regulatory Impact Assessments (RIAs).
The core economic rationale for CBA is threefold:
Most costs and benefits can be quantified and compared.
The analysis is based on individuals’ willingness to exchange income for regulatory benefits (e.g.,
willingness to pay higher taxes for environmental improvements).
E.g., if a water conservation measure saves households $100/year in avoided drought costs, CBA assumes
they would willingly pay up to $100/year in taxes or fees for it. Two
economic
CBA recognizes that the impacts of regulation are unevenly distributed and originally assumed, per assumptions
the Kaldor-Hicks test, that beneficiaries could theoretically compensate those who are harmed.
A regulation is Kaldor-Hicks efficient if the winners could theoretically compensate the losers (through
taxes, subsidies, etc.) and still retain a net gain.
E.g., If a pollution rule saves $200 million in healthcare costs (benefiting the public) but costs factories
$150 million, the regulation is efficient because net benefits ($50 million) allow for hypothetical
compensation to factories. The compensation principle acts as a theoretical benchmark to justify pol-
icies that improve overall societal welfare, even if some groups lose, making the policy "efficient" in
theory. It simplifies decision-making by reducing complex trade-offs (health vs. jobs, environment vs.
profits) to a monetary calculus. Hypothetical compensation is a tool to identify policies with net so-
cietal gains, not a mechanism for fairness. Many laws (e.g., the Clean Air Act) require CBA, which in-
herently relies on Kaldor-Hicks logic.
Modern CBA simplifies this by focusing on willingness to pay, but distributional effects remain diffi-
cult to calculate, especially over time.
Discounting is a key technique in CBA, used to make monetary amounts comparable across time by ac-
counting for the time value of money. This is particularly important when the costs and benefits of regu-
lation are distributed over different time periods (e.g., short-term benefits vs. long-term environmental
costs).
Discounting allows regulators to compare immediate and future impacts, which is crucial for policies
with long-term consequences, such as climate change or environmental regulation. The process requires
regulators to clearly identify when costs and benefits will accrue. If the timing is unclear, it undermines
the ability to monetize and compare impacts effectively.
The challenge of continuous time flow complicates the identification of when the "future" starts, which
can affect the accuracy and coherence of discounting and, therefore, the overall CBA, ergo the quality of
regulatory decisions.
Because time is experienced subjectively and lacks a single, natural starting point,
agencies have flexibility in choosing when to begin their analysis.
Starting Point Rowell suggests that agencies should use one year from the initial promulgation
of the analysis as the cut-off point, a practice already common because discount-
ing is typically done in whole years. This approach aligns the treatment of future
costs and benefits for both discounting and non-discounting purposes.
The endpoint of an analysis may sometimes be set by statute. When it is not,
agencies face a choice.
One approach is to use a single, consistent endpoint for all analyses (as suggested
Ending Point by Posner, who advocates ignoring distant-future generations). However, this
could be too broad for minor rules and too narrow for significant, long-term regu-
lations (such as those addressing climate change).
Therefore, Rowell suggests that agencies might instead adopt inconsistent time
Regulatory Policy and Regulatory Justice
- Historical Development of (US) Regulatory Policy -
Wiener and Alemanno pointed out regulation is typically justified as a way to correct market failures
(such as externalities (unintended side effects), information asymmetry, and market power abuses) as
well as to address social problems like discrimination.
However, regulation can create its own issues: high compliance costs, stifling innovation, encouraging rent-
seeking (where groups seek benefits through regulation), and sometimes serving narrow private interests instead
of the public good.
The lack of effective oversight can result in poorly designed regulations, regulatory capture (where regulators
serve special interests), and inefficiency. Oversight is necessary to ensure regulations are effective, efficient,
transparent, and accountable.
In response to the Great Depression, President Franklin Roosevelt’s New Deal P
introduced major regulatory reforms in the US. These reforms expanded fed- H
eral powers and created new procedures for regulatory agencies (notably, the A
⬇
1930s S
Administrative Procedure Act of 1946) to follow when seeking to introduce
(The New Deal)
new regulatory interventions. While these measures aimed to address eco- E
nomic crises, they also led to an unchecked proliferation of regulations, often
lacking proper assessment of their necessity or effectiveness. 1
Economic challenges like the OPEC oil crisis prompted waves of deregulation
and privatization, seeking to address inefficiencies and high costs associated
with earlier regulatory approaches.
⬇
1970s–1980s
(Deregulation) By the end of the 1970s, the regulatory system in the US was seen as dysfunc-
tional: regulations were often incoherent, costly, and ineffective. The process
had become politicized and stagnant.
President Jimmy Carter campaigned on regulatory reform and selective dereg-
ulation, aiming to reduce regulatory burdens and increase accountability.
Carter introduced cost-benefit analysis (CBA) as a tool for agencies to rational- P
ize regulations, not to resist them, but to ensure they were justified and effi- H
cient. A
S
Carter’s Executive Order 12044 required agencies to analyze the impact of
proposed regulations, make those analyses public, and adopt the least burden- E
some approaches, including market mechanisms instead of traditional com-
⬇
1977–1981 2
mand-and-control regulation.
(Carter Administration)
Carter also established cabinet-level oversight councils and supported legisla-
tion like the Regulatory Flexibility Act (requiring agencies to consider impacts
on small entities) and the Paperwork Reduction Act (creating the Office of In-
formation and Regulatory Affairs, OIRA).
Although Carter did not succeed in making regulatory analysis a permanent
legal requirement, his administration established principles for regulatory re-
form, especially the use of benefit-cost balancing, that became standard prac-
tice in later administrations.
, Reagan’s Executive Order 12291 (1981) required all major regulations to un-
dergo CBA and be submitted to Office of Information and Regulatory Affairs
(OIRA) (within the Office of Management and Budget in the White House) for
review, making CBA the substantive standard for agency decision-making.
This order centralized authority in OIRA, shifted the burden of proof to agen-
1981–1989 cies to demonstrate compliance with CBA standards, and allowed OIRA sub-
(Reagan Administra-
tion)
stantial control over agency actions.
⬇
OIRA could suspend or delay agency actions if the analysis was unsatisfactory,
and agencies could appeal to the Presidential Task Force on Regulatory Relief
or ultimately the president.
The Reagan program went further than previous efforts by explicitly requiring
CBA as a decision rule, centralizing compliance authority, and emphasizing
regulatory relief (reducing the number and burden of regulations).
President Clinton’s Executive Order 12,866 built on Reagan’s earlier order by
1993–2001 continuing the requirement for agencies to conduct CBA and submit their anal-
⬇
(Clinton Administra- yses to OIRA.
tion)
Clinton’s order introduced substantive and procedural reforms, especially
measures to make OIRA’s review process more transparent.
The economic boom of the 1990s led to a global focus on improving regulatory
quality and oversight. (aiming to address some of the limitations of CBA and
improve the overall effectiveness and legitimacy of regulatory policy)
Regulatory Impact Assessment (RIA) expanded from a narrow focus on costs
and deregulation to a comprehensive appraisal method that incorporates both
economic and non-economic considerations. This evolution was influenced by
the growing recognition that high-quality regulation requires clear problem
definition and the use of systematic decision-making tools like CBA and RIA to
determine whether regulation is warranted.
⬇
The OECD evaluates and shares best practices among member states, while the
EU’s "Better Regulation" policies aim to ensure regulation is proportionate, P
effective, and legitimate, addressing concerns about over-regulation. H
Supranational bodies like the World Bank, the EU (via the Mandelkern Report), A
1990s and the OECD have articulated standards for good regulation. According to S
(Global Regulatory
the OECD, regulation should: E
Policy)
Serve clearly identified policy goals and be effective in achieving them. 3
Have a sound legal and empirical basis.
Produce benefits that justify costs, considering economic, environmental,
and social effects, and the distribution of impacts across society.
Minimize costs and market distortions.
Promote innovation through market incentives and goal-based approaches.
Be clear, simple, and practical for users.
Be consistent with other regulations and policies.
, Be compatible with competition, trade, and investment principles at both
domestic and international levels.
After the 2008 Global Financial Crisis, there was a move towards reregulation to address the failures that con-
tributed to the crisis.
President Obama institutionalized regular reviews of existing regulations to
identify and revise or repeal rules that were outdated, ineffective, or unneces-
sarily burdensome.
The administration emphasized protecting public health and welfare while
2009–2017 promoting economic growth, innovation, and job creation. Obama’s regulatory
(Obama Administra- strategy sought to consider both the benefits and costs of regulation, expand- ⬇
tion) ing opportunities for public participation, simplifying rules, and ensuring regu-
lations were based on sound science.
Obama reaffirmed and modestly expanded requirements for RIAs, encouraging
agencies to use evidence and analysis for major rules and to apply these prin-
ciples to independent agencies as well.
OIRA's oversight role weakened, and CBA was manipulated to serve deregula-
tory goals.
Trump’s deregulatory agenda targeted regulations in sectors such as automo-
2017–2021 tive, hazardous pollutants, energy efficiency, and climate policy (e.g., the Clean
(Trump Administration) Power Plan). ⬋
Although CBA had been a bipartisan tool for assessing regulation, under Trump
it was used more strategically to justify deregulation, sometimes distorting its
traditional economic rationale.
Regulatory decision-making methodologies
1. Quantification Approach: CBA
CBA requires regulators to calculate and compare the costs and benefits of a proposed regulation, ap-
proving it only if the benefits exceed the costs.
Helping to decide whether or not to regulate, often at the lowest possible cost and with the greatest possible
benefit.
E.g., air quality regulation saves 20 lives annually. Each life is valued between $3 million and $7 million (a
common range for the value of a statistical life in regulatory analyses). Total mortality benefits:
20 × ($3M to $7M) = $60M to $140M
Reduced illness (morbidity) and improved air quality aesthetics add $40 million in benefits.
Total Benefits:
($60M to $140M) + $40M = $100M to $180M
Implementation costs total $200 million.
Net Benefits (Benefits – Costs):
($100M to $180M) − $200M = −$100M to −$20M
Both the lower and upper bounds of net benefits are negative, meaning costs outweigh benefits in all sce-
narios. Regulations typically require net benefits ≥ $0 to be justified under a strict CBA framework. If the
same regulation would cost $200 million, it would fail CBA.
Over recent decades, CBA has become a deeply embedded practice in many jurisdictions, either as a
, standalone methodology or as part of broader Regulatory Impact Assessments (RIAs).
The core economic rationale for CBA is threefold:
Most costs and benefits can be quantified and compared.
The analysis is based on individuals’ willingness to exchange income for regulatory benefits (e.g.,
willingness to pay higher taxes for environmental improvements).
E.g., if a water conservation measure saves households $100/year in avoided drought costs, CBA assumes
they would willingly pay up to $100/year in taxes or fees for it. Two
economic
CBA recognizes that the impacts of regulation are unevenly distributed and originally assumed, per assumptions
the Kaldor-Hicks test, that beneficiaries could theoretically compensate those who are harmed.
A regulation is Kaldor-Hicks efficient if the winners could theoretically compensate the losers (through
taxes, subsidies, etc.) and still retain a net gain.
E.g., If a pollution rule saves $200 million in healthcare costs (benefiting the public) but costs factories
$150 million, the regulation is efficient because net benefits ($50 million) allow for hypothetical
compensation to factories. The compensation principle acts as a theoretical benchmark to justify pol-
icies that improve overall societal welfare, even if some groups lose, making the policy "efficient" in
theory. It simplifies decision-making by reducing complex trade-offs (health vs. jobs, environment vs.
profits) to a monetary calculus. Hypothetical compensation is a tool to identify policies with net so-
cietal gains, not a mechanism for fairness. Many laws (e.g., the Clean Air Act) require CBA, which in-
herently relies on Kaldor-Hicks logic.
Modern CBA simplifies this by focusing on willingness to pay, but distributional effects remain diffi-
cult to calculate, especially over time.
Discounting is a key technique in CBA, used to make monetary amounts comparable across time by ac-
counting for the time value of money. This is particularly important when the costs and benefits of regu-
lation are distributed over different time periods (e.g., short-term benefits vs. long-term environmental
costs).
Discounting allows regulators to compare immediate and future impacts, which is crucial for policies
with long-term consequences, such as climate change or environmental regulation. The process requires
regulators to clearly identify when costs and benefits will accrue. If the timing is unclear, it undermines
the ability to monetize and compare impacts effectively.
The challenge of continuous time flow complicates the identification of when the "future" starts, which
can affect the accuracy and coherence of discounting and, therefore, the overall CBA, ergo the quality of
regulatory decisions.
Because time is experienced subjectively and lacks a single, natural starting point,
agencies have flexibility in choosing when to begin their analysis.
Starting Point Rowell suggests that agencies should use one year from the initial promulgation
of the analysis as the cut-off point, a practice already common because discount-
ing is typically done in whole years. This approach aligns the treatment of future
costs and benefits for both discounting and non-discounting purposes.
The endpoint of an analysis may sometimes be set by statute. When it is not,
agencies face a choice.
One approach is to use a single, consistent endpoint for all analyses (as suggested
Ending Point by Posner, who advocates ignoring distant-future generations). However, this
could be too broad for minor rules and too narrow for significant, long-term regu-
lations (such as those addressing climate change).
Therefore, Rowell suggests that agencies might instead adopt inconsistent time
