Guidelines for Preparing Economic Analyses

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227

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UNITED STATES ENVIRONMENTAL PROTECTION AGENCY

2001

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Table of Contents

Preface i

List of Acronyms and Abbreviations vii

Acknowledgments ix

Chapter 1: Introduction 1

Chapter 2: Statutory and Executive Order Requirements for Conducting Economic Analyses 5

Chapter 3: Statement of Need for the Proposal

3.1 Introduction 9

3.2 Problem Definition 9

3.3 Reasons for Market or Institutional Failure 9

3.4 Need for Federal Action 10

Chapter 4: Regulatory and Non-Regulatory Approaches to Consider

4.1 Introduction 11

4.2 Traditional Design-Based Command and Control 11

4.3 Performance-Oriented Approaches 11

4.4 Market-Oriented Approaches 12

4.4.1 Descriptions of Market-Based Approaches 12

4.4.2 Selecting Market-Oriented Approaches 13

4.5 Non-Regulatory Approaches 14

4.6 Fine-tuning Policy Approaches 15

4.7 References 16

Chapter 5: Overview of Economic Analysis of Environmental Policy

5.1 Introduction 19

5.2 Economic Framework and Definition of Terms 19

5.3 Baseline Specification 21

5.3.1 Guiding Principles for Baseline Specification 21

5.3.2 Compliance Rate Issues and Baseline Specification 23

5.3.3 Multiple Rules or Regulations and Baseline Specification 25

5.3.4 Summary 25

5.4 Predicting Responses to a New Environmental Policy 26

5.5 Analyzing and Presenting Uncertainty 27

5.5.1 Guiding Principles for Uncertainty Analysis 27

5.5.2 Performing Sensitivity Analysis 28

5.5.3 Welfare Considerations Related to Uncertainty and Risk 29

5.6 Emerging Cross-Cutting Issues 30

5.7 References 31

Chapter 6: Analysis of Social Discounting

6.1 Introduction 33

6.2 General Considerations in Social Discounting 34

6.2.1 Social and Private Discounting 34

6.2.2 Methods for Summarizing Present and Future Costs and Benefits 34

6.2.3 Sensitivity of Present Value Estimates to the Discount Rate 36

6.2.4 Distinguishing Discounting from Other Procedures 37

6.3 Approaches to Social Discounting 38

6.3.1 Intra-Generational Social Discounting 38

6.3.2 Inter-Generational Social Discounting 48

6.4 Discounting and Non-Monetized Effects 52

6.4.1 Perspectives on Discounting Non-Monetized Effects 53

6.4.2 When Discounting Non-Monetized Effects Is Appropriate 53

6.4.3 When Discounting Non-Monetized Effects Might Not Be Appropriate 54

6.5 References 56

Chapter 7: Analyzing Benefits

7.1 Introduction to Analyzing Benefits 59

7.2 A Conceptual Framework for Benefits Analysis 60

7.2.1 Welfare Measures: Willingness to Pay and Willingness to Accept Compensation 60

7.2.2 Market Goods: Using Consumer Surplus and Demand Curves 61

7.2.3 Non-Market Goods 62

7.3 The Benefit Analysis Process 62

7.3.1 A General "Effect-by-Effect" Approach 62

7.3.2 Implementation Principles 65

7.4 Types of Benefits Associated with Environmental Policies 66

7.4.1 Human Health: Mortality Risks 68

7.4.2 Human Health: Morbidity 68

7.4.3 Amenities 69

7.4.4 Ecological Benefits 69

7.4.5 Reduced Materials Damages 71

7.5 Methods for Benefits Valuation 71

7.5.1 Market Methods 72

7.5.2 Revealed Preference Methods 73

7.5.3 Stated Preference Methods 83

7.5.4 Benefit Transfer 85

7.6 Values for Major Benefit Categories 87

7.6.1 Human Health: Mortality Risks 87

7.6.2 Human Health: Morbidity Risks 94

7.6.3 Ecological Benefit Valuation 98

7.6.4 Materials Damage 100

7.7 References 101

Chapter 8: Analyzing Social Costs

8.1 Introduction 113

8.2 The Theory of Social Cost Analysis 113

8.2.1 An Illustration of Social Costs and Externalities 114

8.3 A General Approach to Social Cost Analysis 115

8.3.1 Estimating the Supply and Demand Equations of All the Affected Markets 115

8.3.2 Determining the Different Types of Social Costs 119

8.3.3 Other Issues Arising in Presentation of Social Costs 123

8.4 Modeling Tools 124

8.4.1 The Basic Framework 124

8.4.2 The Direct Compliance Cost Method 124

8.4.3 Partial Equilibrium Analysis 125

8.4.4 Multi-Market Models 126

8.4.5 General Equilibrium Analysis 126

8.5 Estimating the Social Costs of Alternative Policy Approaches 130

8.5.1 Direct (or Standards-Based) Controls 130

8.5.2 Incentive-Based Controls 131

8.5.3 Voluntary Actions 135

8.6 Summary and Conclusions 135

8.7 References 137

Chapter 9: Distributional Analyses: Economic Impact Analyses and Equity Assessments

9.1 Introduction 139

9.1.1 A Process for Economic Impact Analyses and Equity Assessments 141

9.2 Economic Impact Analysis 143

9.2.1 Introduction to Economic Impact Analysis 143

9.2.2 Statutes and Policies Requiring Examination of Economic Impacts 143

9.2.3 Models for Assessing Economic Impacts 145

9.2.4 Calculating Compliance Costs 147

9.2.5 Screening for Potentially Significant Impacts 148

9.2.6 Profile of Affected Entities 149

9.2.7 Impacts on Prices 151

9.2.8 Impacts on Production and Employment 152

9.2.9 Impacts on Profitability and Plant Closures 153

9.2.10 Impacts on Related Industries and Consumers 155

9.2.11 Impacts on Innovation, Productivity, and Economic Growth 155

9.2.12 Impacts on Industry Competitiveness 155

9.2.13 Impacts on Government Entities and Not-for-Profit Organizations 156

9.3 Equity Assessment 160

9.3.1 Introduction 160

9.3.2 Statutes and Policies Requiring Equity Assessment and Definitions of Sub-Populations 161

9.3.3 Entity Size 161

9.3.4 Minority Status and Income Level 164

9.3.5 Childhood Status 166

9.3.6 Case Specific Equity Dimensions 167

9.3.7 A Framework for Equity Assessment 168

9.3.8 Data for Conducting Equity Assessments 170

9.4 References 172

Chapter 10: Using Economic Analyses in Decision Making

10.1 Introduction 175

10.2 Communicating Assumptions and Methods 175

10.3 Presenting the Results 176

10.3.1 Results from Benefit-Cost Analysis 177

10.3.2 Results from Economic Impacts Analysis and Equity Assessments 177

10.3.3 Results from Cost-Effectiveness Analysis 178

10.4 Use of Economic Analyses in Policy Choices 178

10.5 References 179

Appendices

A. An SAB Report on the EPA Guidelines for Preparing Economic Analysis 181

B. EPA’s Response to SAB Review 205