# Cost-benefit analysis, applied to regulations, is a crock. **URL:** \ **Category:** Great Debates\ **Created:** [January 24, 2011, 11:25am UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770 "2011-01-24T11:25:58Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![foolsguinea](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foolsguinea/32/14751_2.png) [@foolsguinea](https://boards.straightdope.com/u/foolsguinea)\ **Post date:** [January 24, 2011, 11:25am UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/1 "2011-01-24T11:25:58Z")
Resolved: When it comes to regulation, cost-benefit analysis is arbitrary, & stupid if not disingenuous. If one is talking about government expenditure as such, then cost-benefit analysis might be meaningful, though it still runs into the question of how one counts benefit. But it is ridiculous beyond belief to say that we should dump regulations or laws because they cost private citizens or companies too much & benefit those same companies too little. Laws aren’t there to maximize a private individual’s profits, but to promote the general welfare. Let’s take the simplest example: Requiring any car driven to be insured. Would this pass cost-benefit analysis? Well, maybe. How are you defining cost & benefit? If the costs are borne by drivers and not the state, is that a cost? How do you count the costs of not being insured? Oh, you could make up answers to this, but at some point you’re probably defining the terms arbitrarily to get a given result. ---
**Author:** ![wmfellows](https://avatars.discourse-cdn.com/v4/letter/w/c2a13f/32.png) [@wmfellows](https://boards.straightdope.com/u/wmfellows)\ **Post date:** [January 24, 2011, 12:26pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/2 "2011-01-24T12:26:39Z")
> [@foolsguinea](#): > > But it is ridiculous beyond belief to say that we should dump regulations or laws because they cost private citizens or companies too much & benefit those same companies too little. Laws aren’t there to maximize a private individual’s profits, but to promote the general welfare. General welfare must include the overall benefit versus overall cost. Your anti corporate rant / spin aside, the concept of using Cost / Benefit (which is always subjective of course, all valuation exercises are subjective) is important to see if reasonably the cost imposed by a regulation is worth the return - it is not a matter of ‘maximising profit’ but roughly ensuring that the costs - which are ultimately passed on to Consumers / Society at Large are worth the supposed benefit. One could otherwise impose some truly absurd regulation for hypothetical benefit, that ends up being a net negative. > [@](#): > > Let’s take the simplest example: Requiring any car driven to be insured. Would this pass cost-benefit analysis? Clearly yes. > [@](#): > > Oh, you could make up answers to this, but at some point you’re probably defining the terms arbitrarily to get a given result. ??? I believe this can only be called Argument from Ignorance. There is quite a lot of literature around cost-benefit analysis and valuation. Merely asserting that one is “probably” defining terms arbitrarily is just … well asserting from ignorance. ---
**Author:** ![Ravenman](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ravenman/32/2929_2.png) [@Ravenman](https://boards.straightdope.com/u/Ravenman)\ **Post date:** [January 24, 2011, 12:59pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/4 "2011-01-24T12:59:26Z")
One can have quantitative cost benefit analysis (let’s add up the numbers and see if this makes/saves more money than it wastes) or qualitative cost benefit analysis (we know that this costs $x, but it is really worth it in a bigger sense?). The OP seems to be saying that quantitative analysis isn’t always appropriate. I’d like to hear an argument on why qualitative analysis is a mistake. ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [January 24, 2011, 1:32pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/5 "2011-01-24T13:32:34Z")
> [@foolsguinea](#): > > But it is ridiculous beyond belief to say that we should dump regulations or laws because they cost private citizens or companies too much & benefit those same companies too little. Laws aren’t there to maximize a private individual’s profits, but to promote the general welfare. Err, the benefit being counted is the benefit to society as a whole, not just the companies being regulated. Presumably most regulations cost the thing being regulated more then it benefits them (at least in the short-term), otherwise there wouldn’t be any need for the regulation. ---
**Author:** ![John\_Mace](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/john_mace/32/185_2.png) [@John\_Mace](https://boards.straightdope.com/u/John_Mace)\ **Post date:** [January 24, 2011, 1:58pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/6 "2011-01-24T13:58:25Z")
> [@OP](#): > > But it is ridiculous beyond belief to say that we should dump regulations or laws because they cost private citizens or companies too much & benefit those same companies too little. Laws aren’t there to maximize a private individual’s profits, but to promote the general welfare. Huh? That’s not the purpose of any regulation I know of-- ie, to maximize the profit of a private company. Care to restate your thesis based on reality? ---
**Author:** ![Paranoid\_Randroid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/paranoid_randroid/32/18_2.png) [@Paranoid\_Randroid](https://boards.straightdope.com/u/Paranoid_Randroid)\ **Post date:** [January 24, 2011, 2:06pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/7 "2011-01-24T14:06:55Z")
> [@foolsguinea](#): > > Resolved: When it comes to regulation, cost-benefit analysis is arbitrary, & stupid if not disingenuous. “Arbitrary” I’ll actually give you: cost/benefit analysis is full of hairy questions, without clear answers, and requires assumptions everywhere. But it’s not _stupid_; it’s simply necessary (first) to make one’s assumptions as clear as possible and (second) to perform sensitivity analyses that use different assumptions. > [@](#): > > If one is talking about government expenditure as such, then cost-benefit analysis might be meaningful, though it still runs into the question of how one counts benefit. A hairy question, yeah. But how do you suggest we get around that? > [@](#): > > But it is ridiculous beyond belief to say that we should dump regulations or laws because they cost private citizens or companies too much & benefit those same companies too little. Laws aren’t there to maximize a private individual’s profits, but to promote the general welfare. As already pointed out to you, the benefit portion of a cost/benefit analysis doesn’t generally refer to benefit toward the regulated company. Rather, we speak of the benefit either to society or to the affected parties (e.g. motorcyclists, if speaking about helmet laws; homeowners, if talking about some noise pollution ordinance; etc.). > [@](#): > > Let’s take the simplest example: Requiring any car driven to be insured. Would this pass cost-benefit analysis? > > Well, maybe. How are you defining cost & benefit? If the costs are borne by drivers and not the state, is that a cost? How do you count the costs of not being insured? Aiee. Yes, cost/benefit analysis opens one up to difficult questions, but that is _by no means_ to call it worthless and stupid. The costs of mandatory car insurance (probably) include the extra amount private citizens will pay for insurance policies, plus the cost of time spent on researching and buying policies, plus the cost of enforcing the law. An analyst might come up with a different definition of costs but – again – this just means that one must clearly stated one’s assumptions and give some indication of how much the answer depends on those assumptions. ---
**Author:** ![SteveG1](https://avatars.discourse-cdn.com/v4/letter/s/bb73d2/32.png) [@SteveG1](https://boards.straightdope.com/u/SteveG1)\ **Post date:** [January 24, 2011, 2:22pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/8 "2011-01-24T14:22:37Z")
Regulations are generally put in place because something happened - something bad. Safety regulations, regulations against embezzlement, regulations against stock fraud, etc. Whether a company makes a profit, is up to them. It is not government’s job to guarantee a profit. I thought business was all libertarian and was against government interference. If so then they should be glad government does not guarantee profit. That would be a form of welfare, and business keeps saying welfare is bad. The only time cost should enter the picture, is when the regulations are so harsh that they force a company out of business. I can’t seem to remember any cases where that REALLY happened, even though businessmen threaten it will happen, any time government looks at them. ---
**Author:** ![wmfellows](https://avatars.discourse-cdn.com/v4/letter/w/c2a13f/32.png) [@wmfellows](https://boards.straightdope.com/u/wmfellows)\ **Post date:** [January 24, 2011, 2:33pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/9 "2011-01-24T14:33:55Z")
> [@SteveG1](#): > > Regulations are generally put in place because something happened - something bad. Safety regulations, regulations against embezzlement, regulations against stock fraud, etc. Yes… > [@](#): > > Whether a company makes a profit, is up to them. No, some regulation can make some kinds of business effectively impossible to be profitable in - or may effectively create a monopoly. That is not “up to the company” per se (in the case of a regulation that makes a certain service or good unprofitable, or only profitible at a price that excludes vast swathes of the population.). The question then becomes, is it worth that, was that effect intended? Cost Benefit analysis intends to try to answer that question with more organised reflection than mere blind assertion and hand waving. Certainly always imperfectly, but at least with an attempt at rigour. > [@](#): > > I thought business was all libertarian and was against government interference. Eh, what the bloody hell does this have to do with the subject (but historically in the real world, many businesses have been all for regulation, particularly where regulation forms a barrier to entry so that they can reap monopoly or oligopoly profits). > [@](#): > > That would be a form of welfare, and business keeps saying welfare is bad. Business is an abstraction covering many different kinds of entities. You may want to join the world of non-abstraction and take note that political entities promote a certain kind of criticism (in the USA this is particularly virulent), but “Business” is not a single unified creature. ---
**Author:** ![Paranoid\_Randroid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/paranoid_randroid/32/18_2.png) [@Paranoid\_Randroid](https://boards.straightdope.com/u/Paranoid_Randroid)\ **Post date:** [January 24, 2011, 2:41pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/10 "2011-01-24T14:41:14Z")
> [@SteveG1](#): > > I thought business was all libertarian and was against government interference. If so then they should be glad government does not guarantee profit. That would be a form of welfare, and business keeps saying welfare is bad. The only time cost should enter the picture, is when the regulations are so harsh that they force a company out of business. Errrm. You’re arguing that costs to a business of complying with a regulation shouldn’t be considered, because if they _were_, it would be essentially welfare? That sounds a little strange to my ears. And there are other costs to consider; perhaps the firm would have hired or paid more, absent the regulation; or invested; or expanded, paying higher taxes. But even beside all that, your post really doesn’t bear on the subject of this thread, whether cost/benefit analysis is worth doing _full stop_. ---
**Author:** ![smiling\_bandit](https://avatars.discourse-cdn.com/v4/letter/s/e9a140/32.png) [@smiling\_bandit](https://boards.straightdope.com/u/smiling_bandit)\ **Post date:** [January 24, 2011, 3:40pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/11 "2011-01-24T15:40:39Z")
Even worse, foolsgineua doesn’t seem to realize that regulations are often a form of protectionism for the companies themselves. It is, after all, a lot easier for big, existing companies with Compliance departments and Legal teams to manage the laws. In a lot of industries, it’s just impossible to get a start-up going because you flat-out need a big staff to manage things. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [January 24, 2011, 5:49pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/12 "2011-01-24T17:49:08Z")
I’ve done quite a bit of this, in an engineering context. Not just theoretical - I had to do it to get internal customers to fund my group. I also teach it now. Cost/benefit analysis makes perfect sense, and can give good guidance as long as the numbers used are realistic. This isn’t as easy as it sounds. The big problem is that the cost numbers are often known more accurately than the benefit numbers. Companies know their costs pretty well - benefits depend both on the probability of a bad outcome without a regulation and the cost of that outcome. One reason it is so easy to pooh-pooh this is that we aren’t good at estimating low probabilities, and our position on the value of a regulation can skew our estimates low or high, which makes the regulation not make sense or make sense. Another problem is that a good regulation avoids costs to society as a whole - but then you have to do a complex insurance benefit calculation to see the benefit. It is easy for anti-regulation people to say that a problem never happened, and so the regulation is useless. Don’t you think that if strong regulations were in place and effectively implemented to prevent the Gulf Spill, someone would say were useless because such a horrible thing had never happened and never would? The reason that regulations get put in after a disaster is that the cost is now fixed in the minds of the public, and everyone estimates the probability of another one as higher than it might be. It would be a lot better to close the barn door before the horse escapes, but that isn’t the way humans work. ---
**Author:** ![foolsguinea](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foolsguinea/32/14751_2.png) [@foolsguinea](https://boards.straightdope.com/u/foolsguinea)\ **Post date:** [January 25, 2011, 11:59am UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/13 "2011-01-25T11:59:07Z")
“Cost” has a commonly understood microeconomic meaning. But on the macroeconomic level, those microeconomic “costs” may be in fact “economic growth.” If the increased cost of regulation creates middle-income enforcement jobs & protects the environment, a right-wing set of definitions may see mostly “costs” (because government jobs & environmental health are “bad”) while a left-wing definition sees mostly benefits (because government jobs & environmental health are “good”). ---
**Author:** ![wmfellows](https://avatars.discourse-cdn.com/v4/letter/w/c2a13f/32.png) [@wmfellows](https://boards.straightdope.com/u/wmfellows)\ **Post date:** [January 25, 2011, 12:54pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/14 "2011-01-25T12:54:10Z")
> [@foolsguinea](#): > > “Cost” has a commonly understood microeconomic meaning. But on the macroeconomic level, those microeconomic “costs” may be in fact “economic growth.” Errr. No. It seems fairly clear you don’t know macro economics. > [@](#): > > If the increased cost of regulation creates middle-income enforcement jobs & protects the environment, a right-wing set of definitions may see mostly “costs” “Right wing”? There is no “right wing” about this. Regulation imposes costs. There may be a benefit that off-sets those costs or maybe not. However, make-work is not adding value to the economy, where what counts is greater efficiency and thus production for a unit of input. Enforcement jobs - income level matters not here - may indeed permit a healthier productive environment to emerge. Or maybe not. The purpose of Cost Benefit analysis is to try to tease that out. > [@](#): > > (because government jobs & environmental health are “bad”) while a left-wing definition sees mostly benefits (because government jobs & environmental health are “good”). This merely demonstrates you know fuck all about either cost benefit analysis or economics. The above is simply politics, divorced entirely from economic or cost benefit analysis as such. An economic analysis or a cost benefit analysis looks to see what the marginal utility of an effort is - given the reality of diminishing returns on any given action. The above statement is complete an utter economic illiteracy (either from a right or a left perspective) as there is no such thing in an economic analysis as an infinite return. You’re not in any way talking about Cost Benefit analysis, you’re simply ranting about your perception of non-Left priorities. ---
**Author:** ![foolsguinea](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/foolsguinea/32/14751_2.png) [@foolsguinea](https://boards.straightdope.com/u/foolsguinea)\ **Post date:** [January 30, 2011, 12:52am UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/15 "2011-01-30T00:52:19Z")
In my experience, GOP politicians don’t know jack about economics, they just campaign against their perception of non-Right priorities. I may be a crank, but you really think the cranks in Congress are any better? ---
**Author:** ![smiling\_bandit](https://avatars.discourse-cdn.com/v4/letter/s/e9a140/32.png) [@smiling\_bandit](https://boards.straightdope.com/u/smiling_bandit)\ **Post date:** [January 30, 2011, 3:28am UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/16 "2011-01-30T03:28:02Z")
> [@foolsguinea](#): > > In my experience, GOP politicians don’t know jack about economics, they just campaign against their perception of non-Right priorities. I may be a crank, but you really think the cranks in Congress are any better? … Right. I’m not even sure why you think A given regulation may or may not be worthwhile (which is why we do cost-benefit analyseswe). But it will reduce economic success. You make the classic political (often left, but really populist) mistake of confusing growth with jobs. Growth means many more jobs later - but not always today. But jobs don’t create growth. Government jobs WILL be resources allocated inefficiently. That might be better than the alternative if the alternative is, say, be conquered by Hitler\*. But that makes it the best option, not a good one, and not one which leads to economic success. Otherwise the Socialist economies would have worked out quite well. There are countries which effectively guarrantee jobs today. Yet they are economic nightmares, and for the same reason: the government is removing production and services from optimized investments and directing it towards poor alternatives. And democratic governments are really, really bad at making the neccessary hard choices, whereas dictatorships have few, if any, motivation to majke good decisions. This in a nutshell is the libertarian, small-government argument, as well. Not everyone agrees with it even if they accept the (repeatedly proven) theory, but there it it. \*Hiiiiiiitttt - LLLLLEEERRRRR! ---
**Author:** ![Martin\_Hyde](https://avatars.discourse-cdn.com/v4/letter/m/47e85d/32.png) [@Martin\_Hyde](https://boards.straightdope.com/u/Martin_Hyde)\ **Post date:** [January 30, 2011, 3:41am UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/17 "2011-01-30T03:41:59Z")
Government should be an advocate of the people over which it rules (especially in representative government when the people are practicing delegated self-rule, but even absolute dictatorships and monarchs **should** be an advocate of their people and the society as a whole.) In its role as “chief advocate”, it is government’s job to make decisions like “is it worthwhile to mandate that every vehicle sold in the United States have a blood alcohol skin-contact detection device built into the steering wheel, that will take readings every 30 seconds to insure the driver is not inebriated?” Some form of cost-benefit-analysis has to be engaged in to make those decisions. So instead of being “crock” it’s actually pretty much the only way to do it in any sane manner at all. The alternatives are “regulations mandated by career politicians for varying reasons” and “regulations mandated because lots of people bitch about something.” Look at regulations on prescription medications, especially the approval of new drugs. Government **has** to do a cost benefit there; it has to say “well, this drug has bad side effects” and then say “well, it’s also the only known treatment for an illness that was previously always fatal” and come to the the right decision. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [January 30, 2011, 4:49am UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/18 "2011-01-30T04:49:03Z")
If anything, we don’t do enough of it. 90% of the cost of pretty much everything is associated with dealing with things that happen less than 1% of the time. For example, we spend billions of dollars on airport and airline security to keep people from hijacking or blowing up planes - but that happened maybe once every five years even when we spent a tenth of the amount. ---
**Author:** ![Grumman](https://avatars.discourse-cdn.com/v4/letter/g/43a26b/32.png) [@Grumman](https://boards.straightdope.com/u/Grumman)\ **Post date:** [January 30, 2011, 11:45am UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/19 "2011-01-30T11:45:42Z")
> [@foolsguinea](#): > > “Cost” has a commonly understood microeconomic meaning. But on the macroeconomic level, those microeconomic “costs” may be in fact “economic growth.” If the increased cost of regulation creates middle-income enforcement jobs & protects the environment, a right-wing set of definitions may see mostly “costs” (because government jobs & environmental health are “bad”) while a left-wing definition sees mostly benefits (because government jobs & environmental health are “good”). Defining “middle-income enforcement jobs” as a benefit is just an example of the broken window fallacy. You’d be better off handing out the money for free than making it contingent on an otherwise unjustified act. > [@Really\_Not\_All\_That\_Bright](#): > > If anything, we don’t do enough of it. 90% of the cost of pretty much everything is associated with dealing with things that happen less than 1% of the time. For example, we spend billions of dollars on airport and airline security to keep people from hijacking or blowing up planes - but that happened maybe once every five years even when we spent a tenth of the amount. And your mindset created the TSA, a cure that is worse than the disease. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [January 30, 2011, 7:07pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/20 "2011-01-30T19:07:37Z")
I think you may be reading my post backwards. ---
**Author:** ![Grumman](https://avatars.discourse-cdn.com/v4/letter/g/43a26b/32.png) [@Grumman](https://boards.straightdope.com/u/Grumman)\ **Post date:** [January 30, 2011, 7:13pm UTC](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770/21 "2011-01-30T19:13:18Z")
> [@Really\_Not\_All\_That\_Bright](#): > > I think you may be reading my post backwards. You’re right. I apologise. [Next page](https://boards.straightdope.com/t/cost-benefit-analysis-applied-to-regulations-is-a-crock/568770.md?page=2)