Abstract: In their recent paper, “Efficient Pollution Regulation: Getting the Prices Right” (henceforth, EPR), Muller and Mendelsohn describe a broader, more appealing concept of efficiency that incorporates information on damages caused by emissions from specific sources: “The science and economics related to pollution control”, they write, “have advanced to the point where regulations can now move from cost-effectiveness to efficiency.” We argue that despite the appeal of the EPR solution, its conclusion that source-specific marginal damage estimates are ready for use in regulations is simply incompatible with the empirical evidence presented in EPR. In particular, we explore the implications of the EPR finding of negative marginal damages from NOx emissions for many heavily populated counties. The associated nonconvexities, we show, imply that the source-specific trading ratios that EPR advocates lead to unattractive outcomes not likely to be efficient. We also discuss how the EPR assumption that the regulators know damages with certainty oversimplifies key aspects of efficient air pollution regulation.

Abstract: Recent legislation has prompted federal regulatory agencies inside and outside the executive branch to develop numerous new major regulations. The Wall Street Reform and Consumer Protection Act alone contains more than 300 provisions expressly stating that rulemaking is required or permitted, although there is uncertainty about the number of rules because some provisions give regulatory agencies authority but not an obligation to issue a rule, some provisions may result in multiple rules, and rules may be used to implement yet other provisions that do not explicitly require or grant rulemaking (Copeland 2010). In summer 2010, the Commodities Futures Trading Commission (CFTC) released a list of 30 areas of rulemaking to implement the Wall Street Reform and Consumer Protection Act (CFTC 2010). The CFTC, like other “independent” regulatory commissions, develops and issues regulations outside the process of regulatory planning and review of the 1993 Executive Order 12866, continued in President Obama’s Executive Order 13563, “Improving Regulation and Regulatory Review” (President Obama 2011). These executive orders, like President Reagan’s 1981 Executive Order 12291, extend to regulatory agencies whose heads serve at the pleasure of the President, such as the Environmental Protection Agency and the Food and Drug Administration, but not to agencies intended to be independent of the President, whose heads can be removed only for cause. These independent agencies include the Consumer Product Safety Commission (CPSC), the Nuclear Regulatory Commission (NRC), the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), and the Federal Reserve Board. Regulations from these independent regulatory commissions (IRCs) are typically developed without adherence to the Executive Order 12866, which requires that major regulations be subject to an analysis of benefits and costs. Here we address the practice of regulatory impact analysis at IRCs. We explore whether information available to the public about the expected consequences of regulatory decisions by IRCs is comparable to or less specific than that made available by executive branch agencies issuing comparable regulations. We focus on only those agencies identified by the federal Office of Management and Budget (OMB) as having issued major final regulations over the past 10 years. We ignore other independent regulatory commissions and agencies, including some identified as such by statute (i.e., the Federal Deposit Insurance Corporation, the Federal Housing Finance Board, the Federal Maritime Commission, the Mine Enforcement Safety and Health Review Commission, the National Labor Relations Board, the Occupational Safety and Health Review Commission, and the Postal Rate Commission) (Paperwork Reduction Act, Section 3502(5)). We do not consider regulatory actions by some agencies that are clearly important, such as the International Trade Commission, whose mission includes administering the U.S. trade remedy laws within its mandate in a fair and objective manner. We do not assess whether final regulations recently issued by these agencies might rise to the level of “major,” nor do we explore the quality of any economic analysis they may conduct in support of regulations.

Abstract: Federal regulatory policy and the evaluation of regulations using benefit-cost analysis continue to be quite contentious. Advocates for more regulation claim that benefit-cost analysis loses information andimpedes our understanding of the real beneficial consequences of regulatory action. Against this backdrop, economists and advocates of economic analysis have sought to improve the quality and technical content of benefit-cost analysis. This paper examines key changes made by the 2003 guidelines in Circular A-4 for regulatory analysis issued by the U.S. Office of Management and Budget in an effort to strengthen such analysis. This paper discusses the motivation and basis for these changes—the treatment of discount rates and uncertainty and the cost-effectiveness analysis for rules affecting health and safety—and evaluates the EPA’s response to the A-4 changes in its analysis of environmental rules.