Cost-Benefit Analysis and Well-Being Analysis?

Article excerpt


Under Executive Order 12,866, (1) as supplemented by Executive Order 13,563, (2) federal agencies are required to prospectively assess the costs and benefits of significant regulations, and also to assess the costs and benefits of alternatives if the annual impacts of the regulations are expected to be equal to or greater than $100 million. (3) These analytic requirements can be traced back to the Ford administration, which used cost-benefit analysis (CBA) to determine whether major regulations would have inflationary impacts. (4) More generally, the roots of such analyses can be traced back to the 1800s, when economists began developing the foundations of welfare economics that underlie the practice of CBA today.

In recent years, some psychologists and economists have become increasingly interested in how individuals rate their own happiness or life satisfaction--often referred to as subjective well-being. In their provocative article, John Bronsteen, Christopher Buccafusco, and Jonathan Masur criticize the conduct of CBA, focusing on the approaches used to value outcomes such as increased prices, unemployment, and reduced mortality risks. (5) They argue that well being analysis (WBA) would effectively address their criticisms by replacing the monetary measures of value used in CBA with well-being units. (6) As a counterpoint, Matthew Adler explores the research on subjective well-being in detail. (7) He concludes that the use of well-being data in policy evaluation is premature, given the need to clarify how well-being should be defined as well as the need to improve how it is measured. (8)

Framing this discussion as "WBA versus CBA" seems far too narrow, however. CBA and WBA aim to provide different types of information, both of which are likely to be of interest to decisionmakers. CBA is not, and should not be, the sole basis for decisionmaking. Rather, it answers a particular question: How can we best allocate scarce resources, given our understanding of individuals' preferences? In CBA, preferences are measured by individuals' willingness to trade money (which represents the ability to purchase other goods and services) for the benefits provided by a particular regulation. WBA asks a somewhat different question: How can we best allocate these resources, given our understanding of individuals' subjective well-being? In this case, well-being is measured by how individuals rate the happiness or life satisfaction associated with various states of being, such as income level or degree of health impairment. Those involved in the policymaking process have diverse interests and goals, and are likely to find these--as well as other types of analysis--useful.

CBA's longevity--and the substantial resources devoted to its development and implementation--suggests that policymakers find that it aids them in making difficult choices. CBA is not the only type of analysis used to inform regulatory decisionmaking, however. Government-wide guidelines instruct agencies to also prepare cost-effectiveness analyses. (9) These analyses involve dividing regulatory costs by an effect measure--such as tons of pollution averted, number of lives extended, or quality-adjusted life years (QALYs) gained--to estimate the cost per unit of benefit. (10) Agencies also often use breakeven analysis to determine how large nonquantified benefits would need to be to equal the costs of the rule. (11) Both types of analyses are designed in part to address the difficulties inherent in estimating diverse regulatory impacts and in determining their dollar value, and in part to provide differing types of information.

In this Commentary, I begin with some background information on the conduct of regulatory CBA and its role in decisionmaking to provide context for what follows. I then discuss how CBA deals with selected issues that have implications for the further development of WBA. I conclude that WBA could be a useful supplement to CBA, but that more work is needed to determine how it can be best implemented. …