Weigh up the costs and the benefits

OECD Observer
Page 30 

When it comes to assessing regulation and safety with regard to particular goods, cost-benefit analysis does not receive the emphasis it should, particularly when compared with the importance of pure risk analysis. The Uruguay Round agreements (see p. 28) give economic assessment only a limited role in the settlement of sanitary and technical disputes. In fact, there is no requirement in the SPS agreement that the economic benefits of any regulatory measures must outweigh the costs. Yet it is becoming clear that some regulatory measures can have net economic drawbacks. To use the terminology of cost-benefit analysis, they have a negative effect on society’s welfare – or well-being – even if the measures reduce risk.

It would be paradoxical if international standards resulted in more trade but a lower level of well-being. Good regulatory practice requires that any regulation be assessed for the bene-fits it offers, and the costs it imposes. Many countries introduce import restrictions on sanitary grounds, such as to avoid the spread of pests, without making any prior estimate of potential losses, which may be very small in comparison with the cost the regulation imposes on industry and consumers. If cost-benefit analysis were used more often, the welfare gains resulting from the regulations could be compared with the welfare gains resulting from freer trade, for example.

In other words, cost-benefit analysis can help public authorities to take better decisions about their national regulations. One study re-commends that the method should be used systematically, since very considerable differences were observed between the cost of public health measures and their real impact on health. For example, the cost per life saved varied between $200,000 and $10,000,000 depending on the programme, which means that more lives could be saved at the same cost to society. Even though society does not accept all risks in the same way, and even though social choices cannot be reduced to comparing the cost of different programmes, cost-benefit analysis is an important stage in the framing of regulations. In fact, it is mandatory for projects of a certain size in the healthcare sector in the United States (Executive Order 12291, 1981).

Methods based on estimates of the cost of illness or the cost of shortened human life may also be used to assess the benefit of regulations. These costs can then be compared with those of sanitary regulations. In practice, this raises many technical and methodological problems. For example, estimates of cancer risk from pesticide residues contain a substantial degree of uncertainty, making any economic estimate particularly difficult. In addition, it is not possible to calculate risk where there is too much uncertainty, making it difficult to carry out analysis with conventional tools. This is the case with the risk of genetically modified organisms propagating genes, or the risk of long-term epidemics, such as any associated with mad cow disease.

Measuring the benefits procured by regulations designed to guarantee certain ethical or cultural aspects of product quality is no easy matter either. Nor is the valuation of imagined risk. However, it may be possible to measure a situation where consumers place particular value on the fact that a good is produced without the use of biotechnology or irradiation, for example, and then estimate their willingness to pay. That would be a good way of showing in money terms how consumer satisfaction would respond to regulations prohibiting the techniques.

©OECD Observer No 216, March 1999

Economic data

GDP growth: -1.8% Q1 2020/Q4 2019
Consumer price inflation: 0.9% Apr 2020 annual
Trade (G20): -4.3% exp, -3.9% imp, Q1 2020/Q4 2019
Unemployment: 8.4% Apr 2020
Last update: 9 July 2020

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