Acting in the public interest – a framework for analysis - ICAEW

ICAEW, as part of a campaign for better regulation, commissioned a review of economicliterature on regulation, which noted a number of concerns about the effects of regulationon economic efficiency. 67 This highlights the need for safeguards such as impact analysis,engagement with relevant people and on-going monitoring and evaluation.3.4 Safeguards3.4.1 Impact analysisOne method of assessing that all relevant factors have been weighed up, and demonstratingthat this has been done, is impact analysis (or effects analysis 68 ), of which a subset is also knownas cost benefit analysis. Governments and other regulators seek increasingly to apply this whenconsidering changes in laws and regulations. It is not a recent phenomenon, cropping up forexample in the US Flood Control Act of 1936 which asserted a responsibility to act where ‘thebenefits to whomsoever they may accrue are in excess of the estimated costs…’ 69It is in principle a variant on utility theory, following the same logic of assessing the positive ornegative value of an action to those affected. It therefore suffers many of the same problems,for example:• the tendency to quantify disregards or pays insufficient attention to effects whosemagnitude is not well understood and overemphasises effects more readily expressed inmonetary amounts; and• cost quantification is often provided by those responsible for implementation, whotherefore have an interest in exaggerating the costs. 70The scope of what can be included in costs and benefits (for example the extent to whichindirect costs and benefits should be included) is also susceptible to being engineered,depending on whether those performing the assessment are subjectively supportive of, oropposed to, the measure. 71Panel 3.3: Contingent valuation modelSome of the issues described above can be dealt with by using a contingent valuation model(CVM). Such models ask about people’s willingness to pay for, or willingness to accept, aproposed measure, ‘contingent’ on their being in the real situation. Thus, for example, theresults to the question ‘how much would you pay to receive a certain non-monetary benefit?’can quantify people’s perception, at least, of the value of that benefit.CVM copes with proposals and actions beyond historical experience, allows for supply anddemand uncertainty, and allows for passive use values - the satisfaction that something merelyexists, or is being preserved for others in the future. However, it does have disadvantages.These include, for example: the hypothetical willingness to pay overstates real willingness –people tend to assume hypothetical events will happen in the future; a tendency for willingnessto accept exceeding willingness to pay; 72 and a distortive effect if benefits cannot be restrictedto those who pay – the ‘free rider’ problem which depresses willingness to pay.Generally recognised national measures such as Gross Domestic Product suffer similar problemswith over-emphasis on monetary measures, 73 so valuation of costs and benefits is not easy, evenat a country level.In practice a more simplistic approach tends to be followed, often considering only oneoption – ‘should we do this or not?’, rather than ‘which of several possibilities is best?’ – andsimplifying the non-quantifiable benefits and costs where information is difficult to come by.For example, it has been observed that in studies of the effects of air pollution, the outcomemeasure has largely been limited to mortality, for lack of easily available information onassociated non-fatal illnesses. 74Impact analysis also tends to look at gains and losses on a composite basis rather than in termsof the effects on individuals. Again, the same issues arise that have been considered previously,for example:67Centre for Economics and Business Research, Regulation in the Market Place: An Economic Literature Review, for ICAEW.68EFRAG, Considering the Effects of Accounting Standards.69Persky, ‘Retrospectives: Cost-Benefit Analysis and the Classical Creed’.70Boden, ‘Cost-Benefit Analysis: Caveat Emptor’.71The Economist, ‘The Rule of More’.72Whitehead and Blomquist, ‘The Use of Contingent Valuation in Benefit – Cost Analysis’.73Considered further in Section 7.2.2.74Boden, ‘Cost-Benefit Analysis: Caveat Emptor’.Credentials for invoking the public interest23