Monetizing the benefits of risk and environmental regulation.

• Author: Viscusi, W. Kip

INTRODUCTION

Should the benefits of risk and environmental regulations be monetized? For economists, this question is not controversial. Benefits of government policies have a value given by society's willingness to pay for these benefits, which by its very nature poses the valuation issue in monetary terms. (1) Government agencies have likewise not shied away from monetizing these benefits. (2) A contrary school of thought, however, has recently emerged, as reflected in the book by Frank Ackerman and Lisa Heinzerling, Priceless: On Knowing the Price of Everything and the Value of Nothing. (3) As the title of the book suggests, the authors oppose economists' attempts to monetize the value of environmental amenities and the value of risks to life and health. In this article, I will review the history of how monetization of benefits came to be the norm for government policy and explore some of the key economic debates that have arisen.

My point of view is the opposite of that of adherents of the Priceless approach. Monetizing risk and environmental benefits does not devalue these outcomes, but rather gives them real economic value when the effects might otherwise be ignored. Through monetization, policymakers are able to count these policy consequences fully and in accordance with the values attached to these outcomes by the citizens affected by the policy. This is not to say that there are no controversies that remain once the monetization approach has been adopted. This Article will explore many of the most sensitive and problematic concerns, including how we should value risks to life, whether old people or rich people should be accorded different values of life, and the proper role of survey methods in benefit valuations. The existence of such controversies arises because the economic approach confronts these policy matters directly and incorporates recognition of how these concerns are valued by the citizenry. In contrast, the Priceless approach in effect disenfranchises the citizens by abandoning the societal willingness-to-pay approach to benefits. With no effort to quantify citizens' valuations, the policy process will be guided by the subjective preferences of policymakers.

From an economic standpoint, the advantages of monetizing benefits are quite strong because establishing this kind of metric makes it much easier to compare benefits with costs and thus make choices across various policy alternatives. (4) For example, if we have $10 million to spend, is it more worthwhile to clean up a hazardous waste site on Long Island, or to reduce water pollution levels in Wisconsin rivers by ten percent, or to adopt safety measures that will lead to an average of three fewer schoolchildren being killed in school bus crashes? Because society's resources are limited, ultimately we must be making choices such as these across different policy domains. To assess which regulatory interventions make sense and which do not, it is essential to have a scorecard by which it is feasible to make such comparisons.

Monetization also has an additional practical benefit in a world of regulatory impact analysis. Costs are quantifiable in dollar terms, as are many benefit components, so failing to place a monetary value on seemingly intangible benefits such as environmental amenities may lead to inadequate attention to intangible benefits in the policy choice process. Monetizing these benefits puts them on equal footing with benefits that are perceived to have real economic value because they can be quantified in dollar terms.

It is useful at the outset to make clear the target of my discussion. From an economic standpoint, for something to be "priceless" means that it has an infinite value. Thus, if saving the snail darter is priceless, no amount of monetary cost should be spared in preserving these fish, even if it depletes the entire GDP. Because no risk or environmental benefit warrants an infinite expenditure, the practical policy issue is what level of monetary cost is justified to obtain the benefit. With costs in dollar terms as our numeraire, the policy choice has the structure of involving an explicit or implicit decision that the value of the benefits exceeds that of the costs for the policy to be worthwhile. Ackerman and Heinzerling oppose this monetization, as well as the cost-benefit approach, but are not clear on what operational substitute or policy criterion they favor. However, it is doubtful that they consider any benefits to be truly "priceless" in the economic sense. (5)

It is useful to start with a bit of background regarding how benefit assessment became a central focus of the policy evaluation process. Beginning with the Reagan administration a quarter century ago, regulatory agencies have been required to assess the costs and benefits of proposed new regulations. (6) Although the economic principles underlying such benefit assessments are well-established, the appropriate methodologies for benefit assessment continue to evolve. (7) Moreover, as the frontiers of the benefit valuation research are extended, new controversies have arisen with respect to the appropriate valuation of these benefits. (8) The benefits associated with health, safety, and environmental risk regulations are particularly controversial because of their distinctive economic characteristics, such as the fact that one's life cannot be replaced. (9) Because these categories of benefits have been the focal point of the "priceless" debate, this paper examines an economic approach to monetizing health, safety, and environmental benefits, with a primary focus on the value of risks to life.

The current regulatory oversight process administered by the U.S. Office of Management and Budget (OMB) Office of Information and Regulatory Affairs (OIRA) is governed by Executive Order 12,866, which was issued by the Clinton administration and has remained in effect since 1993. (10) This executive order requires that agencies assess regulatory benefits and costs and suggests that they explore possible monetization of these benefits. (11) In particular, section 1(b)(6) states: "Each agency shall assess both the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs." (12)

For all major regulatory initiatives, Executive Order 12,866, section 6(a)(C)(ii) requires that agencies undertake the following benefits analysis:

An assessment, including the underlying analysis, of benefits anticipated from the regulatory action (such as, but not limited to, the promotion of the efficient functioning of the economy and private markets, the enhancement of health and safety, the protection of the natural environment, and the elimination or reduction of discrimination or bias) together with, to the extent feasible, a quantification of those benefits[.] (13) In theory, government agencies could use a variety of possible metrics to measure benefits. One could, for example, translate benefits into equivalent numbers of statistical lives that are saved, river miles for which the water quality is improved, endangered species that are saved, or some other metric. The primary currency in which benefits are assessed is dollars because, ultimately, agencies are required to compare benefits and costs. From the standpoint of maximizing social welfare, they should choose those regulations that provide the greatest net benefits to society, though their legislative mandates are often framed more narrowly. Because costs are in financial terms, placing benefits in comparable terms would place them on equal footing and facilitate such comparison. Moreover, most economic commodities are traded in markets and, as a consequence, explicit monetary prices are available. (14) As I will indicate below, many environmental commodities are traded implicitly in markets or have values that can be elicited through simulated market experiments, and, as a result, it is feasible to attach dollar values to many seemingly unquantifiable benefits. (15)

The OMB has continued to emphasize the importance of monetizing benefits in the various reports it has issued in its efforts to outline the analytical underpinnings of regulatory impact assessment. In its 2003 OMB Circular A-4, OIRA reiterated the importance of quantifying benefits. Its outline of the key elements of regulatory analysis included the following comment:

With this information, you should be able to assess quantitatively the benefits and costs of the proposed rule and its alternatives. A complete regulatory analysis includes a discussion of non-quantified as well as quantified benefits and costs. A non-quantified outcome is a benefit or cost that has not been quantified or monetized in the analysis. (16) OMB expands on these requirements by emphasizing the importance of monetizing benefits from the standpoint of establishing comparability with costs: "A distinctive feature of BCA [Benefit-Cost Analysis] is that both benefits and costs are expressed in monetary units, which allows you to evaluate different regulatory options with a variety of attributes using a common measure." (17)

Even though monetization of benefits has become a standard operating procedure as part of regulatory policy assessment, there nevertheless are legitimate economic controversies that remain. The remainder of the Article explores some of the ongoing debates within the economics community as well as the more salient critiques that non-economists have offered.

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