574 REGULATORY PROGRAM OF THE UNITED STATES GOVERNMENT IV. RATIONALE FOR CHOOSING THE PROPOSED REGULATORY ACTION The RIA should include an explanation of the reasons for choosing the selected regulation. Ordinarily, the regulatory alternative selected should be the one that achieves the greatest net benefits. If legal constraints prevent this choice, they should be identified and explained, and their net cost should be estimated. Where uncertainties are substantial or a large proportion of benefits cannot be monetized, other methods of summarizing the benefit-cost analysis besides in the form of net benefits may sometimes be appropriate. When alternative forms of presentation are used, the objective must continue to be the maximization of net benefits (except where prohibited by law). Alternative criteria must be used with care because of the potential for errors or misinterpretation. Agencies need not calculate the internal rate of return for a regulation. The internal rate of return is often difficult to compute and is problematical when multiple rates exist. It must not be used as a criterion for choosing between mutually exclusive alternatives. As a criterion for choosing between alternatives that are not mutually exclusive it has no advantages over the criterion of maximizing the present value of net benefits. Benefit-cost ratios, if used at all, must be used with care to avoid a common pitfall. It is a mistake to choose among mutually exclusive alternatives by selecting the alternative with the highest ratio of benefits to costs. An alternative with a lower benefit-cost ratio than another may have the higher net benefits. Whether a regulation's benefits are greater (or less) than its costs can be determined by whether its benefit-cost ratio is greater (or less) than one. The benefitcost ratio may be used as a very simplified indicator of the likely sensitivity of the result: If the benefit-cost ratio is much greater than one, the conclusion that regulation's benefits exceed its costs probably is not sensitive to likely alternative parameter values. If the ratio is only slightly greater than one, the conclusion probably is sensitive. The benefit-cost ratio may sometimes be acceptable as a rough substitute for genuine sensitivity analysis where it is not feasible to carry out a full sensitivity analysis (e.g., if the number of regulatory parameters to be tested by sensitivity analysis is large). When so used, the benefit-cost ratio should be recognized as only a crude approximation to a genu ine sensitivity analysis and the analyst should be aware of its limitations (e.g., the benefit-cost ratio is sensitive to the arbitrary classification of an item as a benefit or an averted cost). Where the benefits of proposed regulatory alternatives include reductions in fatality risks, an acceptable alternative to direct calculation of net benefits is the indirect approach of calculating incremental costs per life saved between adjacent alternatives. This is done by ranking all the alternatives according to the number of lives they save and then calculating the change in costs and the change in lives saved between each alternative and the one with the next highest number of lives saved. If the alternative selected is the one whose incremental cost per life saved is closest to the willingness-to-pay value of life, this decision criterion is analytically equivalent to that of maximizing net benefit. In cases where important benefits cannot be assigned monetary values, cost-effectiveness analysis should be used where possible to evaluate alternatives that generate equivalent nonmonetizable benefits. Costs should be calculated net of monetized benefits. Between two alternatives with equivalent nonmonetizable benefits, the alternative with the lower net costs should be selected. Cost-effectiveness analysis should also be used to compare regulatory alternatives in cases where the level of benefits is specified by statute. V. STATUTORY AUTHORITY The RIA should include a statement of determination and explanation that the proposed reg. ulatory action is within the agency's statutory authority. Further Reading Edith Stokey and Richard Zeckhauser, A Primer for Policy Analysis. Chapters 9 and 10 provide a good introduction to basic concepts. E. J. Mishan, Economics for Social Decisions: Elements of Cost-Benefit Analysis. Assumes some knowledge of economics. Chapters 5-8 should be helpful on the important subjects of producers' and consumers' surpluses (not discussed extensively in this guidance document). W. Kip Viscusi, Risk By Choice. Chapter 6 is a good starting point for the topic of valuing health and safety benefits. Other, more technical, sources are given in the bibliography. CASE STATEMENT ADMINISTRATION ACTION ON REGULATORY RELIEF FOR SMALL COMMUNITIES BACKGROUND For the past several decades, Washington has accelerated its use of federal regulations as a means to use state and local governments to carry out federally established policies on behalf of the national government. While the majority of these regulations were initially conditions of receipt of federal assistance, more recently Congress and the Administration have increased their use of outright or direct-order mandates which are not the result of participation in federal aid programs. Examples of such regulation include the creation of a 55 mph speed limit; the mandate for bilingual education in public schools; and a host of environmental regulations protecting the air, land and water. In 1979, a National Science Foundation-funded research project discovered that local governments dealt with more than 1,000 federal and state mandates annually. Now, almost a decade later, the national government has yet to get a handle on the mandate situation. Rather than improving, the problem has grown far worse; and it now threatens the very health and stability of the nation's small governments and their local economies. Small governments do not have a large staff of experts or other resources to respond to federal mandates. All too often, federal laws and regulations assume that all localities can absorb mandated new costs or administrative procedures; but the sad reality is that the vast majority of local governments have very little access to such expertise, and most are quickly approaching a financial breaking point. The truth is that most of our nation's local governments are small--86 percent are under 10,000 people; 72 percent are smaller than 3,000, and fully half of all localities have fewer than 1,000 people. By and large, these governments provide essential services through the largely volunteer efforts of dedicated citizens--housewives, farmers, shopkeepers, and plumbers--every day American folk who know little about the technical details of chemical seepage or hazardous materials spills, but could tell you a great deal about what their communities want, need, and can afford. "THE TAIL IS WAGGING THE DOG" A large part of the problem is that federal requirements are generally designed with the larger local governments in mind- Reg Flex Case Statement often the 3 percent of localities with more than 50,000 inhabitants and which have the resources to comply; the opposite should be the case. As a result, federal rules are usually very prescriptive and extremely costly. While their goals are wellintended and often supported by local officials, local leaders are rarely given the opportunity to find more suitable alternatives. More often than not, agencies arbitrarily set rigid standards without regard to local capacity. As a result, the requirements are unrealistic and usually cannot be met, especially by small localities; consequently, they afford no protection and are tantamount to doing nothing. THE REGULATORY FLEXIBILITY ACT Consideration of less costly alternatives, a variety of technologies, varying levels of performance, or in some cases, outright exemptions from the rule should be an ongoing part of the regulatory process. In fact, Congress recognized the need to develop a flexible regulatory procedure which would consider the unique character and problems of small entities in the rule-making process; and as a result it enacted "The Regulatory Flexibility Act" in 1980. This Act directs federal agencies "as a principle regulatory issuance," to "fit regulatory and information requirements to the scale of the business organizations, and government jurisdictions subject to regulation" (emphasis added). As a means to achieve this principle, the law requires agencies to solicit and consider flexible regulatory proposals and to explain the rationale for their actions to assure that such proposals are given serious consideration. Officials from small localities viewed the "Regulatory Flexibility Act" as a major positive development to deal with the problem of unrealistic regulatory expectations, but unfortunately the Act has not worked well, since federal agency personnel quickly found loopholes to avoid application of the Act's requirements. Under the law, agency heads can certify that a proposed rule has "no substantial impact on a significant number of small entities" and waive analysis or consideration of alternative regulatory approaches. Agency heads are not required to prove by documentation that such is the case, and since the terms "substantial" and "significant" are relative terms, officials from small localities are hard pressed to prove otherwise. In reality, the burden of proof has been shifted from the federal agency which has resources to do an analysis, to the small local entity which has none. |