Although federal regulation of vehicle fuel economy is often seen as environmental policy, over 70% of the estimated benefits of the 2017–2025 federal standards are savings in consumer expenditures on gasoline. Rational-choice economists question the counting of these benefits since studies show that the fuel efficiency of a car is reflected in its price at sale and resale. We contribute to this debate by exploring why most consumers in the United States do not purchase a proven fuel-saving innovation: the hybrid-electric vehicle (HEV). A database of 110 vehicle pairs is assembled where a consumer can choose a hybrid or gasoline version of virtually the same vehicle. Few choose the HEV. A total cost of ownership model is used to estimate payback periods for the price premiums associated with the HEV choice. In a majority of cases, a rational-choice explanation is sufficient to understand consumer disinterest in the HEV. However, in a significant minority of cases, a rational-choice explanation is not readily apparent, even when non-pecuniary attributes (e.g., performance and cargo space) are considered. Future research should examine, from a behavioral economics perspective, why consumers do not choose HEVs when pricing and payback periods appear to be favorable.

Investing in global health and development requires making difficult choices about what policies to pursue and what level of resources to devote to different initiatives. Methods of economic evaluation are well established and widely used to quantify and compare the impacts of alternative investments. However, if not well conducted and clearly reported, these evaluations can lead to erroneous conclusions. Differences in analytic methods and assumptions can obscure important differences in impacts. To increase the comparability of these evaluations, improve their quality, and expand their use, this special issue includes a series of papers developed to support reference case guidance for benefit-cost analysis. In this introductory article, we discuss the background and context for this work, summarize the process we are following, describe the overall framework, and introduce the articles that follow.

In 2014, the National Highway Traffic Safety Administration finalized its rear visibility regulation, which requires cameras in all new vehicles, with the goal of allowing drivers to see what is behind them and thus reducing backover accidents. In 2018, the Trump administration embraced the regulation. The rear visibility rule raises numerous puzzles. First, Congress’ grant of authority was essentially standardless – perhaps the most open-ended in all of federal regulatory law. Second, it is not easy to identify a market failure to justify the regulation. Third, the monetized costs of the regulation greatly exceeded the monetized benefits, and yet on welfare grounds, the regulation can plausibly be counted as a significant success. Rearview cameras produce a set of benefits that are hard to quantify, including increased ease of driving, and those benefits might have been made a part of “breakeven analysis,” accompanying standard cost-benefit analysis. In addition, rearview cameras significantly improve the experience of driving, and it is plausible to think that in deciding whether to demand them, many vehicle purchasers did not sufficiently anticipate that improvement. This is a problem of limited foresight; rearview cameras are “experience goods.” A survey conducted in 2019 strongly supports this proposition, finding that about 56 % of consumers would demand at least $300 to buy a car without a rearview camera, and that fewer than 6 % would demand $50 or less. Almost all of that 6 % consists of people who do not own a car with a rearview camera. (The per-person cost is usually under $50.) These conclusions have general implications for other domains in which regulation has the potential to improve social welfare, even if it fails standard cost-benefit analysis; the defining category involves situations in which people lack experience with a good whose provision might have highly beneficial welfare effects.

The U.S. regulatory response to the import of potentially contaminated food from Japan following the Fukushima Daiichi nuclear power facility meltdown has not been closely examined. The incident caused global concern about the safety of foods imported from Japan. U.S. scientists and policymakers conducted an initial evaluation of the potential health risks, analyzed information and data from foreign governments and international organizations, adopted an import alert, and conducted extensive monitoring. They did not detect radionuclides in, adopt a ban on, or advise consumers to alter their consumption of foods from Japan. Using a modified Global Simulation Model, National Marine Fisheries Service monthly seafood import data and United Nations trade data, we performed a comprehensive retrospective benefit-cost analysis of U.S. actions on U.S.-Japan trade in fish and seafood. We estimate that U.S. regulatory policy preserved approximately $150 million in annual consumer surplus from the continued import of Japanese fish and seafood (at a cost of less than $1 million for import sampling), while finding no additional exposure to harmful radionuclides. The lesson of our analysis is that investment in regulatory infrastructure has tangible economic benefits, and that retrospective benefit-cost analysis can be a useful framework for evaluating catastrophe risk-related policy strategies.

The estimates used to value mortality risk reductions are a major determinant of the benefits of many public health and environmental policies. These estimates (typically expressed as the value per statistical life, VSL) describe the willingness of those affected by a policy to exchange their own income for the risk reductions they experience. While these values are relatively well studied in high-income countries, less is known about the values held by lower-income populations. We identify 26 studies conducted in the 172 countries considered low- or middle-income in any of the past 20 years; several have significant limitations. Thus there are few or no direct estimates of VSL for most such countries. Instead, analysts typically extrapolate values from wealthier countries, adjusting only for income differences. This extrapolation requires selecting a base value and an income elasticity that summarizes the rate at which VSL changes with income. Because any such approach depends on assumptions of uncertain validity, we recommend that analysts conduct a standardized sensitivity analysis to assess the extent to which their conclusions change depending on these estimates. In the longer term, more research on the value of mortality risk reductions in low- and middle-income countries is essential.

This paper compares the U.S. Environmental Protection Agency’s (EPA) ex ante compliance cost estimates for the 2004 Automobile and Light-Duty Truck Surface Coating National Emission Standards for Hazardous Air Pollutants to ex post evidence on the actual costs of compliance based on ex post cost data gathered from a subset of the industry via pilot survey and follow-up interviews. Unlike many prior retrospective studies on the cost of regulatory compliance, we use this newly gathered information to identify the key drivers of any differences between the ex ante and ex post estimates. We find that the U.S. EPA overestimated the cost of compliance for the plants in our sample and that overestimation was driven primarily by differences in the method of compliance rather than differences in the per-unit cost associated with a given compliance approach. In particular, the U.S. EPA expected facilities to install pollution abatement control technologies in their paint shops to reduce emissions of hazardous air pollutants, but instead these plants complied by reformulating coatings.

In 1948, the RAND Corporation, formed to connect military planning with research and development decisions, became an independent nonprofit organization. Before then, cost-effectiveness analysis, benefit-cost analysis, and systems analysis had no established home in the federal government. In the 1950s, under the leadership of Charles Hitch, Chief, RAND Economics, undertook a program of activities they called “systems analysis,” including evaluation of the costs and effectiveness of weapon systems. In 1961, Robert McNamara appointed Hitch to be the Comptroller of the Department of Defense and invited Hitch to carry out his vision he described as “Programming and Systems Analysis.” Programming became the Planning, Programming, Budgeting System (PPBS) and the Five-Year Defense Program that linked strategies to forces to budgets. Systems Analysis assisted the Secretary to make choices of weapon systems and strategies. In 1965, Hitch returned to California and ultimately became President of the university. McNamara wanted Systems Analysis to report directly to him, and on his recommendation, President Lyndon Johnson appointed me Assistant Secretary for Systems Analysis. In 1966, the President directed that all departments in the executive branch establish offices based on the Systems Analysis model. In 1967, Henry S. Rowen became President of the RAND Corporation. He broadened RAND’s scope beyond the military to include Health Services, education, urban problems including homelessness, ethics in scientific research, and climate research. In 1970, Rowen led the establishment of the Pardee RAND Graduate School, offering a doctoral degree in Public Policy Analysis to extend widely the application of the RAND Systems Analysis approach to many fields.

In benefit-cost analysis, fatality risk reductions are usually valued based on estimates of adults’ willingness to pay for changes in their own risks, regardless of whether the risk reduction accrues to adults or children. This approach reflects the relatively large number of valuation studies that address adults; however, the literature on children is growing. We review these studies, focusing on those that estimate values for both adults and children using a consistent approach to limit the effects of between-study variability. We rely on explicit selection criteria to identify studies that measure reasonably comparable outcomes and are candidates for application to analyses of U.S. policies. The ratio of values for children to values for adults ranges from 0.6 to 2.9; however, most estimates are greater than 1.5. Although some studies suggest that the divergence between child and adult values decreases as the child ages, this finding is not universal. We conclude that analysts should test the sensitivity of their results to the use of higher values for children than adults. Additional empirical research is needed to support more precise estimates of the variation in values by age that can be featured in the primary analysis.

Methods for identifying relevant policy impacts for valuation in benefit-cost analyses (BCAs) have received relatively little attention in academic research, applied policy analyses, and guidance documents. In this paper, we develop a systematic, transparent, and replicable process that draws upon information contained in records of Congressional hearings to identify relevant policy impacts for valuation in a BCA. Our approach involves classifying – and subsequently analyzing – statements from witnesses testifying in Congressional hearings on the topic of the BCA. By using Congressional hearings as the basis for our approach, we are identifying potential policy impacts from information provided during the very process the BCA is intended to inform. However, because this approach is quite resource-intensive and would be somewhat burdensome for agencies to implement, it may be best applied in the academic realm, with identified impacts resulting from such applications then made available to agency personnel for potential inclusion in BCAs. Using the case of the Glen Canyon Dam, we demonstrate the approach and its resulting improvements in the quality and transparency of the BCA it was intended to inform.

Valuing changes in time use is often a critical element of economic analyses of development projects. In this paper we review the literature on the monetary value of time in low- and middle-income countries and find support for a commonly used benchmark of 50% of after-tax wages for time changes in activities in the informal sector, such as collecting water or traveling to health clinics. We offer recommendations to analysts who are conducting benefit-cost analyses in these settings about what methods they can use to estimate the value of time. These include a benefits transfer approach and also a relatively simple stated preference approach that might be deployed in a specific context if the project recommendation is sensitive to the assumption of the value of time or if the distribution of the benefits of time savings is especially important.

This paper provides an overview of theoretical, empirical, and practical arguments in favor of or against a correction for the marginal excess burden of taxation (MEB). Benefit-cost analysis (BCA) should be used to compare the costs and benefits of a policy measure and its major alternatives, and whenever relevant, also to compare different ways of financing this. The best pragmatic approach is then to assume first that a policy measure is financed out of general tax revenues and then that the MEB of these taxes is broadly counterbalanced by the benefits of redistribution of these taxes. The latter assumption is consistent with the preferences for equality in a country’s current tax system. It is a simple and politically neutral assumption, and it implies that the marginal cost of public funds is equal to 1 and that no correction is needed in BCAs for the MEB. This shortcut assumption does not imply that the tax system is optimal or that BCAs should be distributionally weighted. Choosing an alternative source of financing, i.e., other than general tax revenues, should be regarded as a separate policy measure that should be analyzed separately in a BCA, including its distortionary and distributive effects.

Crime is an important outcome in many social policy evaluations. Benefits to society from preventing crime are based on avoiding victimization and freeing criminal justice system resources. For the latter, analysts need information about the marginal cost of policing for different types of crime across jurisdictions; however, this information is not readily available. This paper details key economic concepts relevant to law enforcement services, and then combines publicly available police expenditure data with insights from observational and time-diary studies to generate state-level, crime-specific, average variable cost estimates for crime-response services conducted by police by crime type. Since there is considerable uncertainty concerning various parameters underpinning these calculations, we use Monte Carlo simulation methods to incorporate the uncertainty into our estimates. This study finds that the U.S. population-weighted average variable cost of law enforcement response per police-reported Part 1 violent crime is $10,900, ranging from $6900 to $15,400 at the 10th and 90th percentiles, respectively. For a Part 1 property crime, the equivalent figure is $1300, with a range from $700 to $1700.

In this study, I examine how the regulatory analysis practices of the Consumer Product Safety Commission (CPSC), an independent regulatory agency, changed when the Consumer Product Safety Improvement Act (CPSIA) of 2008 relaxed its statutory obligations to conduct benefit-cost analysis (BCA). When given discretion, the agency dropped the practice despite significant institutional experience in conducting regulatory BCA and a history of using BCA as a key input to regulatory decisions. While the decision reflects an agency belief that omitting BCA would speed rulemaking under the CPSIA, the results have been mixed. Moreover, choosing to forego BCA-based decision-making fundamentally changed the agency’s regulatory portfolio. In contrast to the typical rule CPSC historically supported with BCA findings, many of the CPSIA rules impose significant economic burdens yet appear to yield negligible benefits. The CPSC would have been unlikely to have pursued the CPSIA rulemakings on its own because it could not have made the necessary BCA findings.

The value of the risk to life is a key element for benefit-cost analysis, enabling more rational public policy decisions in diverse areas as environmental, health, and crime. We value the risk to life in the context of crime using a discrete choice experiment (CE). The method has clear advantages in that it applies to the whole population and does not require vast data from labor markets, for example. Such data are not always available even in developed economies. Combining the stated preference approach with contingent valuation (CV), CE offer advantages yet to be explored in the context of crime. We demonstrate the application in a developing economy, where similar valuations are not available. The best estimate obtained for Argentina is an average of 1.5 million in 2015 US dollars per statistical life with a confidence interval ($1.1–$2.3). This result is consistent with estimates for the developed world, after appropriate transfer. We also analyze demographic factors in the risk to life, finding a positive influence of income, risk aversion, previous victimization experience and family size on the value of a statistical life, as well as a negative impact of individualism.

The primary focus of this paper is to offer guidance on the analysis of time streams of effects that a project may have so that they can be discounted appropriately. This requires a framework that identifies the common parameters that need to be assessed, whether conducting cost-effectiveness or benefit-cost analysis. The quantification and conversion of the time streams of different effects into their equivalent health, health care cost or consumption effects avoids embedding multiple arguments in discounting policies. This helps to identify where parameters are likely to differ in particular contexts, what type of evidence would be relevant, what is currently known and how this evidence might be strengthened. The current evidence available to support the assessment of the key parameters is discussed and possible estimates and default assumptions are suggested. Reporting the results in an extensive way is recommended. This makes the assessments required explicit so the impact of alternative assumptions can be explored and analysis updated as better estimates evolve. Some projects will have effects across different countries where some or all of these parameters will differ. Therefore, the net present value of a project will be the sum of the country specific net present values rather than the sum of effects across countries discounted at some common rate.

There is strong interest in both developing and developed countries toward expanding health insurance coverage. How should the benefits, and costs, of expanded coverage be measured? While the value of reducing the financial risks that result from insurance coverage have long been recognized, there has been less attention in how best to measure such benefits. In this paper, we first provide a framework for assessing the financial value from health insurance. We focus on three distinct potential benefits: Pooling the risk of unexpected medical expenditures between healthy and sick households, redistributing resources from high- to low-income recipients and smoothing consumption over time. We then use this theoretical framework and an illustrative example to provide practical guidelines for benefit-cost analysis in capturing the full benefits (and costs) of expanding health insurance coverage. We conclude by considering other potential financial effects of broad insurance coverage, such as the ability to consolidate purchases and thus lower input prices.

For decades, the U.S. Air Force has contemplated replacing the A-10 Thunderbolt II “Warthog” with a newer fighter aircraft. However, a quantitative analysis comparing the Warthog’s performance and costs with those of its intended replacement, the F-35 Lightning II Joint Strike Fighter, shows that retiring the Warthog would be operationally unsound and fiscally imprudent. The rationale for the replacement is that it would increase airpower capability while controlling costs. That rationale does not withstand scrutiny. An effectiveness analysis based on results from a survey of joint terminal attack controllers indicates that the A-10 vastly outperforms the F-35 in providing close-air support (CAS), a critical requirement for future conflicts against terrorists and insurgents. A cost analysis demonstrates that replacing the A-10 before its service life ends in 2035 would cost at least $20.9 billion. The replacement plan would waste substantial resources and seriously impair U.S. military capabilities. Given that constrained future budgets and low-intensity conflicts requiring precision CAS can be expected, the U.S. air fleet should include the A-10 Thunderbolt II.

Two cost-benefit analysis methods developed from differing economic situations and analytical objectives in the 1960s and 1970s. The Trade Policy Approach of Ian Little and James Mirrlees analyzed international competitiveness of projects producing private goods and physical infrastructure in markets severely distorted by trade protectionism; it was adopted in 1975 by the World Bank; the multilateral regional development banks followed suit. The Public Finance Approach of Arnold Harberger developed from comparative statics analyses of public projects and policies in the United States and was adopted at the US Agency for International Development and in several Latin American countries. The original Trade Policy Approach included social analysis too tedious for everyday application, leading an efficiency-only version to emerge and be popularized by teaching materials from Price Gittinger and colleagues in the World Bank’s Economic Development Institute. It proved the right method for World Bank use until Washington Consensus reforms, the GATT and WTO reduced price distortions, and slowly restored private international financial flows gave private industry access to international private investment capital. Official Development Assistance (ODA) portfolios responded by refocusing on public goods and market failures, leading to decreased utility of the Trade Policy Approach and decreased use of cost-benefit analysis at the World Bank. A 1990s drive in the World Bank to switch from the Trade Policy Approach to the increasingly relevant Public Finance Approach resulted in an internal manual and operational guidelines, but not a book from a distinguished university press, commonly presumed to signal official Bank policy. It is time for that long-overdue book to be published.

“Uncertain futures” refers to a set of policy problems that possess some combination of the following characteristics: (i) they potentially cause irreversible changes; (ii) they are widespread, so that policy responses may make sense only on a global scale; (iii) network effects are difficult to understand and may amplify (or moderate) consequences; (iv) time horizons are long; and (v) the likelihood of catastrophic outcomes is unknown or even unknowable. These characteristics tend to make uncertain futures intractable to market solutions because property rights are not clearly defined and essential information is unavailable. These same factors also pose challenges for benefit-cost analysis (BCA) and other traditional decision analysis tools. The diverse policy decisions confronting decision-makers today demand “dynamic BCA,” analytic frameworks that incorporate uncertainties and trade-offs across policy areas, recognizing that: perceptions of risks can be uninformed, misinformed, or inaccurate; risk characterization can suffer from ambiguity; and experts’ tendency to focus on one risk at a time may blind policymakers to important trade-offs. Dynamic BCA – which recognizes trade-offs, anticipates the need to learn from experience, and encourages learning – is essential for lowering the likelihoods and mitigating the consequences of uncertain futures while encouraging economic growth, reducing fragility, and increasing resilience.