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1 Introduction Regulatory agencies regularly confront difficult trade-offs among im- portant values, such as health, safety, longevity, and the monetary and nonmonetary costs and benefits associated with protecting human health and well-being against the hazards of modern life. Those responsible for reducing deaths and illnesses due to encounters (sometimes years earlier) with toxic substances and other potential health and safety hazards must often assess uncertain events. They must also balance benefits and costs that are difficult to characterize or measure. Individual analysts and entire regulatory agencies, such as the Environmental Protection Agency (EPA), have devoted considerable effort to improving benefit-cost analysis, cost- effectiveness analysis, and other ways of characterizing trade-offs among key values. However, some analytic approaches and techniques and the details of their application remain controversial. For example, once scientists have identified the risks involved in prob- lems such as pollutants in the air and water, unsafe factory conditions, dangerous consumer products, and threats from toxic chemicals, regulatory attention shifts to the question of what kind and how many resources should be devoted to reducing or avoiding the risk in question. Consider some common examples: Which policies will do the most to improve the safety of children's toys? Who will pay for the health effects of asbestos exposure? Should we require copper smelters to reduce or eliminate fugitive arsenic emissions? How do we know whether preventing further ozone depletion is worth a particular effort? Such choices, because they involve inherently scarce resources, attach values to the consequences of the actions involved. This volume reports on the results of a conference planned and con- ducted by an independent committee of volunteers appointed by the Na- tional Research Council to address an important set of issues encountered in using formal approaches to valuing risks, costs, and benefits in health and safety policy making. During the 1980s, interest in comparing benefits and costs of proposed regulations was stimulated in EPA and several other 3

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4 INTRODUCTION federal regulatory agencies, partly in response to a sharper focus by the President and the Office of Management and Budget (OMB) on reducing private-sector expenditures associated with regulation. The difficulty of de- veloping explicit values for human lives extended, disabilities avoided, and others has led these agencies to search for practical yet theoretically defen- sible approaches to risk valuation and to benefit-cost or cost-effectiveness analysis. As a part of that effort, the committee organized a conference that surveyed recent scholarship in law, philosophy, political science, and economics and discussed what research, if any, would be likely to lead to improved regulatory decision making, particularly benefit-cost analysis. Neither the conference nor the more general search for improved benefit-cost analysis has produced complete agreement within agencies, across agencies, in Congress, in OMB, and among interest groups about valid ways to improve valuation of risks, costs, or benefits. Rather, the search has revealed, and in some instances sharpened, disagreements about the appropriateness of specific attempts to value risks for health, safety, and environmental regulation and about methods and approaches for do- ing so. Instead of integrating analysis of environmental, health, and safety risks into complete discussions of regulatory decisions, those who oppose or support particular regulations have often chosen to separate them from consideration of other factors, to politicize the analysis, or both. And dis- agreement about some of the ethical issues underlying benefit-cost analysis can allow such politicization to continue. Consequently, agencies producing analyses find themselves repeatedly challenged in court and in Congress for exceeding their statutory charters, failing to account for important noneco- nomic concerns-such as the special nature of human life-or inadequately addressing other issues, such as effects that would be felt only a very long time in the future. The central policy-making problem for health and safety regulation is thus the very practical question that assisted the committee in organizing the conference, as well as its conclusions and recommendations: What is gained by explicit treatment of the inherent values and trade-offs? Since any regulatory decision involves resource expenditures by individuals, firms, government, or other parts of society, some examination of resource expen- ditures and what is received for them seems appropriate. But how should this be done, especially when intangibles like human health are involved? Is there any prospect for improvements in benefit-cost analysis that would pro- duce increased consensus on its underlying assumptions and application? Interest has grown among regulators, scholars, and analysts in exploring some of the most troublesome issues underlying valuation techniques and approaches in an effort to understand the sources of disagreement and the possibility for achieving more consistent, valid, and practical approaches. These issues include:

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INTRODUCTION (1) (2) s administrative, legal, and statutory constraints on application of benefit-cost analysis techniques; the philosophical foundations of using a common monetary met- ric to represent human life and health; moral issues involved in comparing health-risk benefits and costs across time and distance, such as individual and collective prefer- ences for who should bear the burdens or benefits of risks across time and distance; the adequacy of scientific information as a basis for placing values on health risks in particular instances; and effects on regulatory policy of new research knowledge about decision making. The balance of this introductory chapter further explores questions raised for researchers, regulatory policy makers, and agency analysts by the use of the valuation techniques we have labeled benefit-cost analysis. RISK ASSESSMENT ANI) BENEFIT-COST ANALYSIS In addressing environmental, health, and safety problems, regulatory agencies are often asked to develop an understanding of both risks and resources. They are asked to assess the risks associated with specific health and safety hazards. They may also analyze the costs and benefits of alternative ways of reducing those risks. Although they operate under different statutes (in some cases, several for one agency), EPA and other regulators such as the Occupational Safety and Health Administration, the Food and Drug Administration, and the Consumer Product Safety Commission have been required for more than a decade to formally assess the health risks associated with exposure to toxic substances and other potential hazards, including air and water pollution, food additives and contaminants, and products and processes in the workplace. During that time there have been a number of efforts to improve the physical, chemical, and biological bases for policy making. More recently, there have been several efforts to examine the process for assessing risks at the Environmental Protection Agency and other federal health and safety regulators. One such effort, by a committee of the National Research Council, examined the process by which federal agencies characterize and determine the risks of cancer for policy-making purposes. The committee's report, Risk Assessment in the Federal Government (National Research Council, 1983), examined procedures used by agencies in the early 1980s to determine cancer risks. It proposed that development of scientific information about specific hazardous risks be separated analytically from decision-making and management activities of a regulatory agency. Such a separation would

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6 (2) DOSE-RESPONSE ASSESSM ENT (5) CONTROL ASSESSMENT Risk Assessment (1 ~ HAZARD , I DENTI FICATION (4) RISK CHARACTERIZATION \ / (7) REGULATORY DECISION Risk Management FIGURE 1 Risk assessment and management process. INTRODUCTION (3) EXPOSURE ANALYSIS (6) BENEFIT-COST ANALYSIS (REGULATORY IMPACT ASSESSM ENT) allow for scientific criteria to be the primary criteria in guiding research and data gathering. The report also constructed a framework for organizing diverse kinds of hazard-related information needed for a complete program of risk man- agement; it is summarized and adapted in Figure 1. In this scheme an agency might begin with a careful process of risk assessment, including data gathering, scientific testing, and evaluation of results, to learn more about human and animal responses to various doses of a potential hazard and about what exposures to that hazard people may be experiencing. The 1983 report acknowledged the reality of contemporary risk assess- ment by identifying areas in which gaps in scientific data and theory often appear. It proposed that agencies develop guidelines for using conservative, scientifically appropriate inferences to bridge the gaps for policy-making purposes rather than either taking ad hoc inferential leaps or postponing action until all scientific uncertainty is removed. 1b properly identify the strengths and weaknesses of any assessment, the report emphasized the need for assessors to make assumptions explicit as well as the need for peer

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INTRODUCTION 7 reviews of the scientific process and results of assessments. In response to proposals such as these, federal regulators have invested considerable effort in recent years to improving assessments of hazards in order to better characterize the risks involved. Although the 1983 report focused primarily on risk assessment, several of its conclusions and recommendations are also relevant to the analysis of benefits and costs in support of risk management. The term benept-cost anahysis refers to a family of approaches and techniques for expressing alternative ways of achieving an objective in quantitative comparable terms. For example, the classical approach is to express all benefits and costs associated with each alternative in dollars as a function of time, discount the future benefits and costs at some appropriate rate, and then compare the alternatives on the basis of the current value of the net benefits or on the basis of an internal rate of return (Quade, 1982:58, uses this common definition; among many others, see Kneese, 1989:295-298~. This classical approach most closely resembles an ideal definition that cannot be applied in many instances due to practical limitations. More often, agencies use a version of benefit-cost analysis that focuses on the cost-effectiveness of alternative policies. That is, a single benefit (e.g., a reduction in pollution) might be analyzed against several potential options with various costs. The distinction is important in that costs but not benefits are being compared. Nevertheless, this volume focuses on philosophical and other assumptions underlying comparisons inherent in analysis of costs, benefits, or both. Therefore, following common practice, in this volume except as otherwise specified, the term benefit-cost amasses also refers to cost-effectiveness analysis and other variations on this theme. For example, after evaluating the potential health risks of a pollutant or toxic substance or consumer product design, regulators may examine the costs of alternative strategies for a uniform reduction in the risk (e.g., eliminate the offending item, mitigate its effects, redesign it, or do nothing), and then compare explicitly the costs of those alternatives. Information about risks, costs, and (when permitted and/or possible) benefits may be summarized and used by regulatory policy makers as part of the basis of a regulatory decision or in order to support one. REGULATORY PRACTICE Regulatory practice has been far less consistent than such a scheme would indicate, however. Approaches to valuing health and safer risks have varied considerably by issue, between agencies, even within agencies, and over time. The sources of such differences are numerous. First, with certain exceptions, Congress grants each regulator considerable discretion in carrying out broad legislative mandates. Regulatory agencies are allowed,

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8 INTRODUCTION encouraged, and even required to exercise discretion in implementing statutes. Second, statutes (and case law) vary as well, some specifying that regulators will consider costs and benefits of alternative policies, others actively prohibiting such economic considerations. While most agencies have considered benefit-cost issues in regulatory matters, statutory variation allows some agencies to pursue the latest techniques and approaches more vigorously than others. Third, and possibly most relevant to the current attention being given to regulatory risk valuation issues, is the evolution of presidential interest in and ability to affect the application of cost calculations in regulatory policy making. Efforts by OMB to guide agency use of statutory discretion to promote greater analytic rigor and consistency in federal approaches to regulatory risk valuation have sparked serious debates about the prospects for reaching those goals. The use of benefit-cost analysis In the federal government is long- standing and well documented. Benefit-cost analysis has antecedents in the early 1930s, as a way of evaluating public water projects. It emerged on a large scale in the early 1960s in the Department of Defense and in federal recreation programs with the use of the Planning, Programming, Budgeting System (PPBS) and its successors. Application of benefit-cost techniques in health and safety matters grew from several White House policy review mechanisms. As an antecedent to formal benefit-cost analysis, in 1971 OMB ordered EPA to submit significant regulatory proposals to an interagency committee for nonbinding discussion. Subsequently, President Ford's 1974 executive order required agency heads appointed by the President to submit for OMB review Inflation Impact Statements (later entitled Economic Impact Statements) on proposed regulations likely to have substantial economic effects. This requirement was used to prod agencies to explain more explicitly the likely economic effects of regulations, but no consistent agreement emerged as to how these statements would or would not be used to inform regulatory decisions. A Carter administration executive order issued in 1978 created a new interagency forum, the Regulatory Analysis Review Group (RARG), chaired by the head of the Council of Economic Advisers, to discuss economic analyses (Regulatory Analyses) of 10-20 key proposed regulations each year. Although benefit-cost analysis was not specifically part of the RARG charter, agencies were asked to include "an analysis of the economic consequences of each . . . alternative." In addition, agencies were directed to solicit public participation, to choose the least burdensome alternative, and to justify the choice. The RARG then reviewed, discussed, and made public nonbinding comments on these analyses and proposed regulations. Within a month after taking office, the incoming Reagan administra- tion issued Executive Order 12291 (February 17, 1981), which replaced the

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INTRODUCTION 9 RARG process with OMB's formal review and clearance of proposed reg- ulations and which required agencies to prepare and to base all major new regulations on formal benefit-cost analyses. The White House emphasized that, within an agency's statutory constraints, the principles guiding regula- tory decisions should be twofold: first, that regulation should be used only in instances in which it is superior to market forces and, second, that reg- ulation should be demonstrated to maximize net benefits to society. More specifically, notable provisions of E.O. 12291 included requirements that regulatory actions should not be undertaken unless potential benefits to society from the regulation outweigh the potential costs to society; among alternative approaches, the alternative involving least net cost to society should be chosen; and that agencies set regulatory priorities to maximize aggregate net benefits, taking into account the condition of particular in- dustries involved. These requirements provided the rationale for OMB's effort to increase the use of formal techniques for determining net benefits to society. In the case of environmental, health, and safety regulation, the executive order prompted OMB to require further efforts on the part of agencies to value alternative policies for prevention of deaths, injuries, and illnesses due to environmental and other hazards. Overall, during the eight-year Reagan administration, OMB reviewed approximately 30 regulatory impact analyses done in support of major new proposed regulations. Between 1981 and 1985, 15 analyses were submitted by EPA in the areas of environmental health and safety regulation. In addition, during this same period of time, OMB chose not to review dozens of other benefit-cost and cost-effectiveness analyses performed by EPA and other regulatory agencies. OMB may have been limited in its coverage of analyses by the size of its own analytical staff. Of approximately 35-40 professional staff in OMB's Office of Information and Regulatory Affairs, nearly all were devoted to regulatory matters in the years l9Bl-1989. Nevertheless, the number of regulations issued by EPA alone in that period totaled over 2,000. CONTINUING ISSUES In actual regulation of health and safety problems, however, the regula- tory agencies' use of formal approaches to valuing risks, costs, and benefits remains unsettled. Particular issues associated with formal valuation remain controversial and the subject of continuing debate. For example, there is no single approach or set of methods for benefit-cost analysis now in use in any federal regulatory agency with responsibility for health and safety. At EPA, for example, of 15 Regulatory Impact Analyses submitted to OMB for review between 1981 and 1985, 6 included direct comparisons of benefits and costs of regulatory alternatives, and 9 concentrated primarily on costs

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10 INTRODUCTION of alternative actions but not benefits (EPA, 1987~. 1b become accepted, even within one agency, any general approach or set of methods would have to address and settle a continuing set of controversies concerning methodological, conceptual, and moral challenges in characterizing and valuing environmental and other health and safety risks. It was this situa- tion that led EPA to request formation of the committee that prepared this conference report. In his keynote address to the conference (Chapter 2 in this volume), Milton Russell, as former Assistant Administrator for Policy, Planning, and Evaluation at the Environmental Protection Agency, points out graphically the importance of these questions to the day-to-day decisions of regulatory agencies and just how difficult it is to resolve the issues they raise. ~ illustrate the point, he asks the question "Where should the sludge from municipal sewage plants be disposed?" By pointing out that every option includes at least some risk to human health and reminding us that the sludge has to go somewhere, he demonstrates how difficult it is to reach satisfactory answers. Despite the difficulties and the imponderables, Russell takes the position that it is irresponsible for a public official to decide without tracing the consequences to the extent possible. In real life, public officials face messy, incomplete answers. Russell feels that the legitimacy of their decisions has to derive from the acceptance of those decisions by the people affected, and that the provision of information about the likely consequences is the basis for principled accountability. Contextual and Legal Constraints Benefit-cost analysis, like any set of decision tools, is affected by the characteristics of the setting in which it is applied, including the specific statutory requirements and restrictions, the distribution of policy-making responsibilities, and the characteristics and behavior of a multiplicity of interest groups. In order to gauge the possibility for developing more con- sistent approaches to risk valuation, it is important to understand variations among agencies in terms of such constraints. What are the scientific, administrative, and political sources of support for considering economic efficiency as an integral part of risk-management decisions, and what are the constraints on doing so? How do statutes, case law, presidential directives, congressional pronouncements, and administrative practice provide guidance in the development and application of benefit-cost analysis for regu- latory decisions? What are the key variations in the use of risk-control analysis by federal health and safety regulators?

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INTRODUCTION 11 In "The Politics of Benefit-Cost Analysis" (Chapter 3), R. Shep Melnick focuses on the political and administrative forces that block wider imple- mentation of formal benefit-cost analysis for federal regulatory decisions. He outlines the sources of opposition to the use of analysis, as well as the mechanisms that are used by major actors-Congress, public interest groups, OMB, and the agencies-to shape general approaches and specific risk valuation practices. Melnick raises the question of whether the current legal and political context will allow for progress in integrating technical benefit-cost analysis with regulatory decision making on health and safety issues. A lack of progress may be due largely to controversies among key policy makers on the moral validity of issues such as placing a value on human life for regulatory purposes. Approaches to Analysis Some analysts and decision makers may find it attractive to value risks, costs, and benefits in terms of a single arithmetically manipulable yardstick that measures all relevant attributes, but various theoretical treatments of value raise problems that must be dealt with in practical applications of the approach. There is, for example, considerable debate about appropriate ways to make comparisons across time and among illnesses, disabilities, and economic or social groups. What might be the foundation for a metric covering a variety of health and safety effects? Can preference-based economic guidelines be accommodated with political, moral, and other statements, especially with respect to assigning, directly or indirectly, values to human life and health? What measurement problems are posed in valuing health risks (e.g., are there appropriate measurement scales, are health effects well ordered)? In "Benefit-Cost Analysis as a Source of Information About Welfare" (Chapter 4), Peter Railton raises some of the doubts he has as a philoso- pher about the approach. He addresses these doubts by asking the question "What do I have to believe in order to do [benefit-cost analysis]?" In look- ing for answers to this question, he considers whether such beliefs seem tenable. For example, he inquires into whether theorists and practitioners of benefit-cost analysis recognize limitations or treat it as sufficient for policy determinations. Railton makes similar inquiries about the assump- tions required to believe the scientific measurements on which benefit-cost analyses are necessarily based and about assumptions associated with the blanket application of discounting.

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12 IN17?ODUCTION Douglas E. MacLean, in "Comparing Values in Environmental Policies: Moral Issues and Moral Arguments" (Chapter 5), addresses a related set of questions. He reviews briefly several approaches to moral inquiry common in the discipline of philosophy and describes how they might be applied to valuation of health effects in environmental policy decisions. He describes weaknesses in both the "low road" of expressed preferences and the "high road" of theoretical or doctrinal moral reason. Examining central paradoxes in the use of discount rates, especially with regard to the valuation of human life, he points out necessary inconsistencies in the universal application of analytic techniques for making environmental policy decisions and proposes case-specific application of such techniques. In particular, he raises problems applicable in any discussion in which not all costs of a policy are borne by the same individuals or groups as those who reap the benefits. These problems are relevant to intertemporal, interpersonal, geographic, and interillness comparisons of risk. How Much Information? It is also important to understand how decision makers cope with information that is imperfect and changing over time, especially since analytic processes and the structuring of data affect the selection of what is included in analyses. This raises a whole series of questions concerning the timing of decisions, their interaction with information-providing activities, and the aims and purposes of the organizations in which they are made. . Can procedures for valuing health risks be made politically feasi- ble or acceptable; for example, can we agree on mechanisms for deciding who should have a say in determining values and specific regulatory policies? How do beliefs about the major consequences of various decisions affect our search for illuminating information? What is the relationship between the need for credible valuation and the need for credible decisions? In `'Environmental Policy Making: Act Now or Wait for More Infor- mation?" (Chapter 6), Jeffrey E. Harris points out that regulatory decisions about environmental hazards are routinely made in the face of huge un- certainties. He characterizes the central problem in the dynamics of such decisions as that of timing to act now or hold out for more information. Harris suggests that a principal reason for waiting is the assumption that environmental policies are irreversible. But he observes that in many cases this involves a kind of self-fulfilling prophesy the longer we wait, the fewer options remain and the more irreversible the decision appears. Harris also suggests that waiting for more research may be equally misguided. The

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INTRODUCT ON 13 best way to gather information, he claims, may most often be to implement the policies and then to evaluate carefully their consequences. This strat- egy, of course, assumes that the expected negative consequences of initial implementation are small relative to the consequences of doing nothing. Handling Uncertainty Behavioral scientists have begun to challenge the simple theoretical model of rational choice underlying most risl`-control analysis, suggesting ways the model might be modified and applied in practical analyses. Much of this work has focused on the handling of uncertainty in formal decision approaches. How should analysts and decision makers acknowledge and cope analytically with uncertainties in the science underlying decisions? Are we sure enough of our ability to characterize the risks of potential health hazards to use those characterizations as a basis for valuation analysis? How do we get better estimates of uncertainty for purposes of practical decision making? In "Choice Under Uncertainty: Problems Solved and Unsolved" (Chapter 7), Mark J. Machina reviews the expected utility model and describes several problems that beset it, including nonlinearity in probabil- ities, preference reversal, and framing effects. He examines the empirical evidence regarding each and suggests how these findings have, are likely to, or should change the way economists view and model private and public decisions under uncertainty. On balance, Machina feels the modern models used to characterize behavioral deviation from expected utility theory are completely consistent with well-defined individual preference ordering, and hence with traditional welfare analysis. What to do about framing effects, however, is itself a public policy issue, in Machina's view. We may be able to look to other previous treatments of the presentation of information for guidance. CONCLUSION Initial drafts of the papers in this volume served as provocative stimu- lants for discussion at the conference. Following the papers is a concluding chapter summarizing discussion among conference participants and the steering committee's conclusions regarding the possibility of incorporating the ideas raised into practical approaches to benefit-cost analysis.

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14 INTRODUCTION REFERENCES Kneese, Allen V. 1989 The economics of natural resources. Pp. 281-309 in Michael S. I3eitelbaum and Jay M. Winter, eds., Population and Resources in Westem Intellectual Traditions. New York: The Population Council. Published as a supplement to Population and Development Review, vol. 14. (Also reprinted as Reprint 243 in the RFF Reprint Series, Resources for the Future, Washington, D.C.) National Research Council 1983 Risk Assessment in He Federal Govemment: Managing the Process. Committee on the Institutional Means for Assessment of Risks to Public Health. Washington, D.C.: National Academy Press. Quade, E.S. 1982 Analysis for Public Decisions. New York: Elsevier Publishers U.S. Environmental Protection Agency 1987 E.PM. Use of Benefit Cost Analysis: 1981-1986. Office of Policy, Planning and Evaluation, EPA-230-05-87-028. Washington, D.C,: U.S. Environmental Protection Agency.