- Benefit-cost analysis - Office of Management and Budget - Cost-effectiveness analysis
In 1981, President Ronald Reagan issued an executive order that all significant regulations must have a ‘benefit-cost analysis.' A significant regulation is one that costs at least $100 million annually.
A benefit-cost analysis examines the need for the proposed regulation and then describes a range of alternative options. It compares the estimated costs of the proposed action and the alternatives to the benefits that will be achieved.
All costs and benefits are given monetary values and compared using a ‘cost-benefit ratio.' A favorable ratio means that the benefits outweigh the costs - the action is considered cost-effective. This means there is an economic justification to follow through with the action.
The Office of Management and Budget puts together cost-benefit analysis reports for major regulations.
Some benefits can be hard to estimate. Figuring out the value of a wetland can involve ‘shadow pricing' to figure out what people might pay to use that benefit.
Benefits gained through the reduction or elimination of pollution have been easier to assign monetary values. For example, the benefit of improved human health is tied to the reduction of pollution disease and deaths, lowered stress and increased productivity.
Cost-effectiveness analysis is an alternative way of evaluating the costs of regulation. How can a goal be achieved at the least cost? Living organisms, for example, can tolerate some minimal levels of pollution without ill effects.
Environmental regulations have succeeded in protecting natural resources significantly in the last 30 years. These achievements are measured using both cost-benefit analysis and cost-effectiveness analysis. For example, through EPA regulation, leaded gasoline has been phased out of public use. The project cost $3.6 billion while the benefits were valued at $50 billion.
Many EPA accomplishments such as cleaning up SuperFund toxic waste sites, decreasing air pollution, increasing recycling and improving drinking water from 1980 to 2010 all occurred while GDP went up by 127%. Environmental policy can be enacted while enjoying significant economic growth.