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Outline for intro to social regulation

What is social regulation?
Why/when do unregulated markets NOT provide a
desirable outcome?
Neoclassical concept: market failures

Behavioral economics: cognitive biases

How can social regulation be done efficiently?

How can the value of social regulation measured?
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How can social regulation be done efficiently?

Cost-Benefit Analysis (CBA)
Conceptually straightforward: regulators should pursue projects
which maximize net social benefits
Alternatively worded: regulators should pursue projects which
constitute potential Pareto improvements
Yet another conceptual description: regulators should pursue
projects which meet satisfy the Kaldor-Hicks criterion

However, implementation of cost-benefit analysis is not

without problems return to the problems AFTER the next
slide.
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Basic description of cost-benefit:

1. Agencies should identify advantages and
disadvantages of proposed regulatory actions
2. Agencies should collect both quantitative and
qualitative information about effects of regulatory
actions
3. Agencies should assess value of effects in monetary
terms
4. Agencies should calculate net value of an action AND
also explain adjustments made for qualitative factors
5. Agencies should be required to show that benefits
exceed costs; if benefits are less than costs, agencies
must explain why proposed action is reasonable
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Problems encountered with CBA

Is it valid to aggregate over individuals assessments to
come up with social measures of benefits and costs?
Is it valid for regulators to make trade-offs between one
persons benefits and another persons costs?

To what extent can we accurately predict future outcomes

of actions taken today, especially when risk is involved?
How do we estimate benefits of regulations impact?
Market demand for things not traded on markets?
How do we evaluate trade-offs between the present and
the future?
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How can value of social regulation measured?

Benefits of social regulation:
Reduced risk of dying prematurely
Reduced risk of pain and suffering
Reduced risk of time away from productive activities leading to
loss of income
Reduced risk of losing non-market objects
Different ways of assigning $ value to these benefits:
Present discounted value of future stream of income lost due to
illness or death
Econometric evidence of wage differentials paid to relatively risky
occupations imputed value from actual choices
Willingness-to-pay and contingent valuation hypothetical
choices
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How can value of social regulation measured?

continued

What is your willingness to pay to reduce probability of

dying (or the price you would charge to accept increased
probability) ?
Size of risk reduction = 1/10,000 = size
Value of a statistical life = your answer divided by size
We expect heterogeneity in answers across different
people, different risks but still some convergence

IF you can decide value for yourself, then why not

make your own decisions about what level of risk is
appropriate?
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Key questions for final exam and/or research project

What is the rationale for regulation?

To what extent does regulation fulfill its rationale?

Who benefits and who bears the costs of regulation?

How does the political and administrative process of

decision-making influence regulation?

How can regulation be made more effective in the future?

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3rd Writing Assignment

Address one of the following questions:

Do you think cognitive biases justify social regulation?

Do you think cost-benefit analysis can improve social

regulation?