Microeconomic Performance: Uses, Gaps, and Opportunities to Apply Benefit–Cost Analysis

• DOI: https://doi.org/10.1016/S0193-5895(07)23004-0
• Published date: 16 October 2007
• Pages: 87-102
• Date: 16 October 2007
• Author: Carol Bray,Scott Farrow,Tim Guinane

MICROECONOMIC

PERFORMANCE: USES, GAPS,

AND OPPORTUNITIES TO APPLY

BENEFIT–COST ANALYSIS

Carol Bray, Scott Farrow and Tim Guinane

ABSTRACT

Benefit–cost and cost-effectiveness analyses form the core of micro-

economic performance measures by which to evaluate federal programs

and policies. The current uses of such measures in the federal government

are summarized and opportunities for their expanded application, sources

of generally accepted analytical principles and opportunities to improve

the consistency and credibility of microeconomic performance measures

are discussed.

1. INTRODUCTION

Benefit–cost analysis and its variants are the standard integrating analyses

for the microeconomic evaluation of public programs. These methods are

taught widely in economic and public policy curricula. A technical literature

of over half a century supports it. Some laws and executive orders require its

application. Although certain aspects of benefit–cost analysis are especially

Research in Law and Economics, Volume 23, 87–102

Published by Elsevier Ltd.

ISSN: 0193-5895/doi:10.1016/S0193-5895(07)23004-0

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controversial outside the profession (e.g.,valuing human health effects), even

within the profession the perception of the tool’s usefulness ranges from

simply a way to order information to identifying the socially optimal

alternative among a set of policy or program alternatives. Nonetheless, the

appeal of benefit–cost analysis is demonstrated by the requirement that

economic performance be assessed and factored into federal agency decision-

making as mandated by several statutes, such as the Unfunded Mandates

Reform Act of 1995, by Executive Orders (currently 12866) and by Office of

Management and Budget (OMB) budgetary guidance such as Circular A-11,

section 300. But to what extent does the federal government use benefit–cost

or cost-effectiveness analysis, called here microeconomic performance? What

are the opportunities for further application? And what weaknesses exist in

the profession’s guidance for those seeking to carry out such analysis?

In order to addressthese questions the authors identified commonly known

applications of economic measures and reviewed the performance reports

developed by six agencies reporting on the status of their programs under the

Government Performance and Results Act of 1993 (GPRA). Reviews were

also conducted of: (1) current OMB guidance for conducting economic

assessments, (2) elements of accounting standards and economic principles

and guidelines for conducting economic assessments, (3) how the accounting

profession sets standards, including selected concept statements of the Federal

Accounting Standards Advisory Board, (4) the recent regulatory reform

debate on ‘‘scorecards’’ and risk assessments to assessfederal regulations, and

(5) selected benefit–cost case studies and existing Government Accountability

Office (GAO) economic evaluations of federal programs.

2. MAJOR CURRENT USES OF MICROECONOMIC

PERFORMANCE MEASURES

Major applications of microeconomic performance measures are identifiedin

this section and results are presented based on a review of the annual

performance reports developed by six federal agencies. The common uses of

prospective economic assessments for government program evaluation are

shown in Table 1. The broad-based uses are for regulatory and investment

purposes that generally occur as result of statutory or Presidential direction.

The use of economic performance measures for regulatoryplanning purposes

has generated a large literature on the application and qualityof such studies

(e.g. Hahn, Burnett, Chan, Mader & Moyle, 2000;Parker, 2003;GAO, 2005)

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