Mercatus Center at George Mason University’s Regulatory Cost Calculator

Note by Jerry Ellig

Regulation creates costs for consumers, businesses, local governments, nonprofit institutions, and other regulated entities. The Regulatory Cost Calculator created by the Mercatus Center at George Mason University is a survey instrument designed to generate better data on the anticipated costs of individual proposed regulations before they become final regulations.

In economics, the word “cost” means “opportunity cost” – the value of the most significant opportunity that an individual or individuals forego as a result of a choice. This is different from the layman’s definition of “cost:” money paid as a result of a decision.[1] Unfortunately, regulatory agencies’ impact analysis usually focuses on direct monetary costs of compliance rather than social opportunity costs. Indeed, sometimes only partial monetary costs are considered, such as paperwork costs.

This is why, in the policy debate over regulation, one frequently hears that benefits are harder to estimate than costs. Some people believe that benefits of regulation are usually harder to estimate than benefits because costs are merely money spent by regulated entities, whereas benefits often involve difficult-to-value things such as clean air or the protection of endangered species. This belief confuses monetary outlays with social opportunity costs. The benefits of a regulation are the ultimate outcomes that improve citizens’ quality of life. The costs of a regulation are the good things society must forego as a result of the regulation. Properly understood, both benefits and costs can be difficult to measure and convert into monetary terms. Whether one is more difficult than the other depends on the regulation.

Monetary outlays for paperwork and compliance are part of the cost of regulation but by no means the entire cost. For example, the enhanced security procedures at airports in the United States in the wake of the September 11 attacks clearly had substantial economic costs. But they also increased waiting time for passengers. The value of this time is a cost of the regulation. As a result of the increased ticket prices and delays, some travelers substituted driving for flying on shorter trips, and driving is riskier than flying.[2] More generally, a regulation may be intended to reduce one type of risk, but it also increases some other type of risk; that increased risk is a cost.[3] Thus, correct estimation of the social cost of a regulation can require assessments of cause-and-effect relationships and monetary valuation challenges that are every bit as difficult as those involved in estimating benefits.

The Cost Calculator is intended to elicit information about the full opportunity costs that regulation imposes on regulated entities, plus gather some data that economists can use to estimate social opportunity costs.

These costs include:

  • direct expenditures on compliance, such as paperwork, new equipment, or employee training;
  • the value of owner, manager, or employee time diverted to regulatory compliance;
  • profit forgone on investments the business no longer makes as it is forced to divert resources to regulatory compliance;
  • the profit businesses lose and the value consumers lose from the price increases, quality changes, or other sales-reducing behavioral responses induced by regulation;
  • the costs of resources that businesses and trade associations expend to influence regulation.

These costs are not always explicit or obvious, because some of them involve lost opportunities rather than expenditures. The purpose of the Cost Calculator is to provide better information on the full cost of regulation by identifying both direct and indirect costs and eliciting information that economists can use to estimate the cost of regulation to customers and our broader society.

Government regulatory analysts can use the Cost Calculator to elicit better information about the expected costs of regulations. Stakeholders can use the Cost Calculator to provide accurate and credible estimates of the costs of proposed regulations to regulators, legislators and their staffs, the media, and the public policy community.

The Cost Calculator can be downloaded free of charge at Mercatus Blog.

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Jerry Ellig, Mercatus Center, George Mason University, jellig@mercatus.gmu.edu

Jerry Ellig is a senior research fellow at the Mercatus Center at George Mason University and a former assistant professor of economics at George Mason University. He specializes in the federal regulatory process, economic regulation, and telecommunications regulation.

 

 

[1] For a full explanation of the difference between economists’ and laymen’s definitions of costs, see James M. Buchanan, Cost and Choice (Chicago: University of Chicago Press, 1969).

[2] Garrick Blalock, Vrinda Kadiyali, and Daniel H. Simon, “The Impact of Post-9/11 Airline Security Measures on the Demand for Air Travel,” Journal of Law & Economics 50, no. 4 (November 2007), 731–56.

[3] Cass Sunstein, “Health-Health Tradeoffs,” University of Chicago Law Review 63, no. 4 (Autumn 1996), 1533–71.