BENEFIT-COST ANALYSIS IN U.S. ENVIRONMENTAL REGULATORY DECISIONS

Abstract

As the number and cost of environmental regulations have increased over the last thirty years, the regulated community, taxpayers, and policy makers have begun to demand that the benefits of regulations justify their costs. The use of benefit-cost analysis as an integral part of developing new regulations is increasing and the demands and expectations being placed on the method have expanded. Although benefit-cost analysis is expected to play an even greater role in environmental decision making in the years ahead, questions remain concerning whether benefit-cost analysis can meet these expectations. This paper explores the role of benefit-cost analysis in US public investment and environmental decision making and examines how benefit-cost methods are responding to new analytic demands. It reviews the US experience with benefit-cost analysis at the Federal and State levels of government and discusses several applications to environmental regulations, illustrating how such analysis can contribute to decision-making as well as pointing out some of the method's pitfalls. The paper also discusses how several important (and sometimes controversial) methodological issues-including intergenerational equity, the distribution of benefits and costs, uncertainty and risk, and the measurement of the value of non-market goods and services-might be addressed practically as benefit-cost analysis is further extended into environmental policy and regulation. Finally, the paper concludes with recommendations for the future use of benefit-cost analysis in environmental decision making.