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Summary
Regulations incur hidden indirect costs, including administrative and political expenses, often overlooked in analyses. These costs, estimated at 20-38% of direct compliance expenses, can lead to overly stringent rules.
Area of Science:
- Environmental economics
- Regulatory policy analysis
- Public administration
Background:
- Benefit-cost analyses (BCAs) traditionally exclude indirect regulatory costs.
- These overlooked expenses include administrative, political, and growth-related costs.
- Previous assessments have not comprehensively quantified these indirect regulatory burdens.
Purpose of the Study:
- To estimate the magnitude of indirect costs associated with regulation.
- To determine if regulatory agencies account for these indirect costs in their analyses.
- To assess the impact of neglecting indirect costs on regulatory stringency and net benefits.
Main Methods:
- Analysis of 20 Inflation Impact Statements (IIS).
- Estimation of indirect costs as a percentage of direct compliance costs.
- Comparison of estimated indirect costs with those reported by regulatory agencies.
Main Results:
- Indirect costs range from 20% to 38% of direct regulatory compliance costs.
- For pollution control regulations, indirect costs are estimated between 22% and 29%.
- All analyzed IIS neglected these significant indirect costs.
Conclusions:
- Regulatory agencies consistently overlook substantial indirect costs in BCAs.
- This oversight can result in the adoption of excessively stringent regulations.
- Neglecting indirect costs may lead to regulations with negative net benefits, undermining efficient policy.