The Economic Analysis of Public Policy

William K. Bellinger

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317634683
• Edition: 2
• Topic: Business
• Subtopic: Business General
• Index: Business

A critical analysis of public policy decisions requires a far greater depth of knowledge than can be received from news reports and political speeches. Issues such as how best to reduce traffic congestion, reduce acid rain, improve airline safety or develop a parcel of land are better understood by organizing, measuring and weighing the effects of alternative policies. The Economic Analysis of Public Policy, now in its second edition, is the ideal introduction to benefit-cost analysis, the economics of efficiency, risk analysis and present value, and is suitable for those with only a modest background in mathematics and economics.

This brand new edition of the book has been rigorously updated throughout in terms of examples and data references, issues covered, and layout and pedagogical features. Key concepts are reinforced through multiple problems and discussion questions within each chapter. This latest edition contains extra material on loss aversion, global warming, technology, and US health care reform, as well as a wider range of international examples. Extra tables have been included in order to clarify more complicated issues. Instructors will also benefit from the new companion website, which will offer power point presentations, answers to end of chapter questions, and a test bank.

This textbook encourages its readers to understand and apply key concepts whilst also learning to appreciate policy analysis as part of an interdisciplinary, analytical, and political process that can lead to better government policy decisions. It is an ideal teaching tool for undergraduate and postgraduate students engaged in Public Administration, Public Economics, and Public Policy.

Section III
Tools for analyzing public policy

The cornerstone of policy analysis is the benefit-cost study. Benefit-cost analysis involves measuring and weighing the gains and losses from any public policy, and recommending the adoption of that policy if its benefits minus costs are greater than those of other alternatives. Chapter 6 introduces the benefit-cost model along with various alternatives and applies these models to several different decision contexts. Chapter 7 presents the concept of present value, an important component of any policy analysis involving long periods of time. Chapter 8 summarizes the theoretical challenges underlying the choice of a discount rate for present value analysis. Chapter 9 introduces the concepts of risk and uncertainty to the analysis of public policy and private decisions, and concludes with an analysis of the policy challenges associated with insurance markets. Chapter 10 discusses the estimation of the dollar value of human life, a naturally controversial topic, along with alternative policy analysis tools for analyzing risk and health-related policies. A section on the high cost of health care in the United States concludes the chapter. Finally, Chapter 11 introduces economic impact analysis. This controversial type of policy analysis is used primarily by advocates of particular institutions or development projects for political purposes. The chapter presents a series of regional models for analyzing the economic effects of a given institution, event, or development project. It then discusses cases related to the arts, sports, and higher education.

6 An introduction to benefit-cost analysis

Information is a source of learning. But unless it is organized, processed, and available to the right people in a format for decision making, it is a burden, not a benefit.¹

William Pollard

The Freedom of Information Act is the Taj Mahal of the Doctrine of Unanticipated Consequences, the Sistine Chapel of Cost-Benefit Analysis Ignored.²

Antonin Scalia, Associate Justice, U.S. Supreme Court

Benefit-cost analysis is the cornerstone of the economic analysis of policy, and is also closely aligned with the rational choice model from microeconomics. The primary goal of this analysis is to identify the policy option with the greatest social net benefit, and therefore the greatest efficiency. Benefit-cost analysis is subject to all of the criticisms discussed in Chapter 1, including possible overemphasis on efficiency versus equity, rational pragmatism versus values, and markets versus government. It is also subject to criticism regarding its attempts to assign dollar values to socially valued goods that are not bought and sold in the marketplace, particularly human life and the assets of nature. This criticism is based partly on the difficulty of assigning such dollar values, and partly on the morally questionable nature of such valuation. However, as we will see in the following five chapters, understanding the meaning and applications of these tools will probably lessen the influence of many of these criticisms. Benefit-cost analysis is a commonly used tool because the efficiency issues it emphasizes cannot be adequately considered any other way.

This chapter also introduces cost-effectiveness analysis, a decision model that can be useful when a full comparison of dollar-valued benefits and costs is not possible or not desirable. Finally, the chapter presents a related model labeled weighted benefit cost analysis, which allows the analyst to assign different values to different affected groups. One application of these weights involves assigning higher values to the net benefits received by the poor.

The process of benefit-cost analysis

The first chapter presented two related outlines of the policy analysis process. Reviewing these lists may be useful before beginning the main topics of this chapter. To repeat one list, Bardach’s (2000) eight-step process includes the following: (1) define the problem; (2) assemble evidence; (3) select criteria for making the decision; (4) identify the policy alternatives to be considered; (5) predict the outcome of each alternative; (6) confront the trade-offs; (7) make recommendations; and (8) tell your story. The primary focus of this chapter is on steps 3 through 7, but a brief review of the process of defining and quantifying a policy problem may also be useful.

Identifying the goals of the policy

The goal of most public policies is to reduce, eliminate, or prevent a particular social or economic problem. Therefore, any convincing policy analysis should have clear and detailed answers to a seemingly simple set of questions: What is the problem? When, where, and how often does the problem occur? What are the causes of the problem? How serious are the harms caused by the problem? As simple as these questions sound, public officials and others are sometimes quite unprepared to answer them in a substantive way. Moreover, advocates on either side of a hot political issue are likely to produce one-sided cases for their position based on selected evidence or biased interpretations. In rising above partisan argument, it is important that an analyst answer each of these questions in an informed and thorough manner.

Assembling information and evidence

In order to understand any policy problem, careful consideration of the academic and professional literature relating to this problem is important. While library resources are important, the typical search for information has taken on an electronic and Web-based dimension that has fundamentally changed the research process. For most people, research now begins with a search of electronic sources such as online library catalogs and databases of academic or professional literature. It is also common to use unguided Web searches by typing keywords into a Web browser. Reliance on this unguided approach is not appropriate for serious research because of the existence of many unprofessional, ideologically biased, or fundraising websites associated with nearly any topic. Most academic libraries subscribe to a large set of academic databases organized by topic. In economics, there is a primary database for economic research, EconLit (www.aeaweb.org/econlit), although my college library lists 32 other databases under the topic of economics. Interdisciplinary sites are also numerous. For example, the Public Affairs Information Service (PAIS), Public Affairs Index, and ProQuest Political Science include a wide range of public administration and public policy literature, and Environment Complete does the same for environmental studies. These data bases for policy literature are sometimes organized through more general information services such as JSTOR (www.jstor.org), EBSCOhost (www.ebscohost.com), or ProQuest (www.proquest.com). Happy hunting!

Your Turn 6.1

1. Go to the EconLit website (www.aeaweb.org/econlit) and type in “extended state unemployment benefits.” This should give you a list of articles that analyze various aspects of the longer time period for collecting unemployment benefits during and after the Great Recession of 2007–2009. If possible, look up one or two articles that are available as PDF documents.
2. Now go to one of your university’s political science databases and conduct the same search.

Once the problem’s causes have been reviewed using relevant academic and professional literature, various types of supporting evidence are needed to quantify and explain the problem and to aid in the formulation of policy alternatives. Analyzing a problem involves defining concepts used in the analysis and critically analyzing statistics and other evidence used to quantify the problem. However, even official government statistics are subject to arbitrary definitions and possible measurement errors, as noted in Chapter 1.

Identifying the seriousness of the problem involves quantifying both the number of people affected by the problem and the intensity of harm suffered by those people. Some problems such as violating speed limits are very widespread but on average not very harmful. On the other hand, problems such as homelessness, airline fatalities, and childhood cancer are comparatively rare but are very serious for their victims. Estimating the frequency of a given problem usually requires broadly based statistics. For national problems in the United States, the federal government is usually the first place to search for statistical data. Government statistics in other developed countries are also considered reliable in most cases. One very useful online source for U.S. federal statistics from any department is FedStats (http://fedstats.sites.usa.gov), although direct searches of federal departments such as the Census Bureau, the Bureau of Labor Statistics, or the Departments of Justice, Transportation, and Education will also reveal a rich trove of statistics. Statistical data is also produced by state and local governments, as well as major private and public universities or research institutes.

Your Turn 6.2

Look up the Bureau of Labor Statistics (www.bls.gov). Either search for “state unemployment rates” in the search box or click on the unemployment rate icon provided on their website.

Policy alternatives and decision criteria

The third and fourth steps in the policy analysis process are to identify alternative policy designs and to determine the criteria for choosing among these alternatives. Policy alternatives may be as general as pollution regulations versus pollution taxes, or as specific as alternative designs for a single highway interchange or sports stadium. In some cases, only one alterative is considered in the analysis, and in others several alternatives may be analyzed.

The decision rules used to analyze policy alternatives depend to some degree on the problem being addressed. The most common rule...