Document Type

Article

Publication Date

1998

Center/Program

Richard Paul Richman Center for Business, Law, and Public Policy

Abstract

Executive orders, statutes, and precedent increasingly require cost-benefit analysis of regulations. Presidential executive orders have long required executive agencies to submit regulatory impact analyses1 to the Office of Management and Budget ("OMB") before issuing regulations,2 and recent federal legislation exhibits a trend toward mandatory cost-benefit analysis. For example, the Toxic Substances Control Act,3 the Federal Insecticide, Fungicide and Rodenticide Act,4 and the recent Safe Drinking Water Act Amendments5 require the Environmental Protection Agency to balance costs and benefits in regulating chemicals and pesticides. In 1995, Congress passed the Unfunded Mandates Act,' requiring cost-benefit analysis of all significant federal regulations that require expenditures by state, local, or tribal governments.7 Additionally, Congress has proposed several billsthat would require federal agencies to apply cost-benefit analysis to all rules.8

This trend raises important questions about the methods agencies use to conduct cost-benefit analysis. To perform the analysis, an agency must first quantify the stream of costs and benefits that a regulation will generate in current and future periods. 9 Quantification, however, is not enough. Because of the time value of money (that is, a dollar today can be invested to yield more than a dollar tomorrow), costs and benefits in different periods are different "goods" and are not strictly comparable. Therefore, the agency must choose a discount rate that will convert future sums into present values. It can then use these present values to compute the net benefit (or "net present value") of the regulation.

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