and the current and future costs to bring those facilities into compliance under the new rule. All of those estimates are associated with an uncertainty that is difficult to accurately quantify. That uncertainty can, however, be qualitatively described, and potential ranges of costs can be used to provide decision makers with information on the effects of potential uncertainty on the estimates of the cost of different regulatory options.
Costs Imposed Economy Wide
The second broad category of costs consists of those costs imposed on other parties by increased prices (EPA, 2010). To the extent that prices increase, the quantities of output in other sectors are affected, which in turn affects the output for the economy as a whole (i.e., the gross domestic product). For example, if an environmental regulation increases the cost of coal mining, the price of coal is likely to increase, which in turn could lead to a decrease in coal consumption and an increase in the use of other energy sources. The increased price of coal would likely lead to an overall increase in energy costs, adding to the cost of manufacturing various products, which could in turn lower national production and employment.
When evaluating the broader costs of regulations, a distinction is often made between partial and general equilibrium analysis. Partial equilibrium analysis examines the effects of a regulatory change on a single firm. For example, a partial equilibrium analysis might assess the effect of a particular environmental regulation on the capital spending decisions of an individual firm. By contrast, general equilibrium analysis considers the effects of a regulatory change on all participants in a market or even in the economy as a whole. Individual sectors do not operate in a vacuum; if regulated firms increase the prices of their products, it may affect outputs (and prices) in other sectors. An analysis of those economy-wide effects, therefore, is often appropriate. Increased prices and reductions in output impose costs on society at large. However, if the potential effects of the regulatory rule are small or localized, there is little reason to assess its impacts on the economy as a whole.
It would be impractical to attempt to assess the economy-wide impacts of individual regulatory rules de novo. Instead it is necessary to employ models that have been developed for more general purposes. One useful tool that EPA has used for these purposes is a computable general equilibrium (CGE) model (EPA/RTI International, 2008). CGE models are a class of economic models that use actual economic data to estimate how an economy might react to changes in policy, technology, or other external factors. CGE models can also be used to compute the distributional impacts of regulatory changes. EPA has used a CGE model for a recent retrospective analysis of the benefits of the CAA (EPA, 2011a).