Benefits and Costs of Regulation

It is usual for regulators to evaluate the cost-benefit of the regulatory suggestions. Such evaluation aims to determine the trade-offs related to regulatory action and suggest alternative solutions.

Regulators rely on economic principles when developing methods to measure a regulation’s costs and benefits. However, the cost-benefit analysis of the regulatory system is a bit challenging. In determining the cost-benefit analysis of regulation, it is easier to determine regulation cost.

Regulationn Costs

1. Regulatory burden (also called private or government burden): These are the costs the party upon which a regulation is imposed incurs.
2. Net regulatory burden: These are the private costs of regulation, less the private benefits of regulation.
3. Implementation costs of regulation: An example is the cost incurred in hiring compliance lawyers.
4. Indirect costs: These are the costs associated with changing economic decisions and actions and varying market allocations.
5. Unintended cost: These costs can be divided into implementation and indirect costs that were not forecasted.

Lastly, it is worth noting that determining the costs and benefits of regulation is a challenging feat when done prospectively rather than retrospectively. Making an informed decision via the retrospective method is relatively simple since before and after outcomes can be compared. Alternatively, a pilot study can be done to analyze the possible impact of a proposed regulation.

Question

Which of the following statements is most likely true about the cost-benefit analysis of regulation?

1. Regulatory costs and benefits are easier to determine prospectively (after-the-fact basis).
2. The net regulatory burden is the private cost of regulation plus the private benefits of regulation.
3. Both statements are true.

Solution

The correct answer is A.

The actual costs and benefits can be comprehensively determined by carrying out a retrospective factual analysis, which allows for a concrete judgment to be made.

B is incorrect. The net regulatory burden is the private cost of regulation, less private benefits.

Reading 10: Economics of Regulation

LOS 10 (h) Describe benefits and costs of regulation