economic impact assessment Costs, benefits, externalities, elasticity, discounting, methods of analysis (CBA, CEA, RRA), modeling, comparative analyses

Krisztian Orban, Ministry of Justice, Hungary

Regional Strategic Workshop on Impact AssessmentRiga, Latvia 2-4 February, 2005

Organized by Open Society Institute and UNDP

Income, benefit, cost

income: monetary items, i.e. turning up as income

benefit: the hardly or non-monetizable items go here as well

cost: the monetary value of the resource-utilization for the sake of an activity

RIA: it is the ‘price’ of a regulation in a wider sense, the burdens and costs as impacts of the legal norm

cost

cost analysis: it shows how the society utilizes its resources for the sake of a regulation aim

it is not enough alone direct costs, non-monetizable costs they can be borne by more players there is a relation between the strictness and

the cost of the regulation

cost categories

numerous types of costs it is difficult to create categories to be able to be used any time

and any case

they shall be created flexibly, with always taking into consideration the nature of the impact assessment

Modified OECD grouping direct governmental costs direct costs affecting the private sphere indirect costs (e.g. costs of social or environmental impacts)

direct governmental costs

also called as fiscal analysis typically it is the only well-elaborated part in

practice the more participants are involved the more

accurate the analysis is (ministries, etc.) other (side-) effects of the regulation could

reverse the (putative) direct budgetary impacts

e.g.: rise of the excise of the tobacco

direct costs affecting the private sphere

all non-favorable impacts in the private sphere of the regulation

the consultation with the stakeholders is important the interests of some stakeholders could distort the results

EU: analysis of the administrative burdens on the enterprises

the cost is very high in the modern economies as well (some percents of the GDP)

can be lowered with aligned steps The methodology of the Dutch Government and Ministry of

Finance is the basis of numerous initiatives

indirect costs

The cost of the (social, environmental, health) impacts indirectly developed, frequently goes beyond the economic sphere

e.g.: regulation on the noise emission of the turboprop aircraft

two special types negative external effects alternative cost

alternative cost

alternative cost[1]: is the value of the most favourable, ‘missed’ alternative due to the limited nature of the resources capable for fulfilling needs and performing activities.

[1] opportunity cost

benefit

difficult to define ‘… the value of the benefit is what the society willing to pay for the

result’ Viscusi, W. Kip: A szabályozási döntéshozatal elemzési alapjainak fejlesztése in OECD: A szabályozás

hatásvizsgálata, 1997, 195. oldal

realization of the hardly or non-monetizable, mostly environmental, moral, aesthetical or cultural aims to be on the ‘positive’ side in many cases

monetizing these impacts makes the decision-making easy for decision makers

grouping direct governmental costs direct benefits affecting the private sphere indirect benefits

direct governmental benefits

two main problems could rise inadequate grouping of the stakeholders

(e.g.: persons heterogeneously acting in the way of budgetary impacts are put into the same group)

Bad estimation of the stakeholders’ reactions (e.g.: because of bad sampling)

direct benefits affecting the private sphere

highest importance: regulations of different subsidies and allowances for individuals, organizations, economic actors from the (local) government

quite good assumption can be given taking into account the former years’ social and economic data

demographic changes, wages, salaries, employment rate, etc.

the difficultness of the estimation is influenced by the timeline which the regulation refers to case maps on assuring the allowances expressed by the regulations

It can extend the regulation’s ‘timeproofness’ if the allowance sums are not specified directly, but „anchored” to another typical data of the given period of time (‘main enemy’: inflation)

indirect benefits

it is not reasonable to separate them from the direct benefits due to the chain of coherency

two specific types positive external effects different allowances, subsidies

factors influencing the success of the assumption ‘timeproofness’ complexity of case maps way to get the available allowances the degree of allowances assigned to the specific

stakeholders Information flow

elasticity

elasticity (e): shows how the percentage change of a variate is in proportion to another variate’s percentage change

most important elasticity indicators price elasticity of demand, income elasticity of demand

demand-elasticities

The demand elasticities show ceteris paribus how the demand of a good changes in percent due to the one percent change of the specific factor influencing the demand.

price elasticity of demand

elasticity indicators can be: perfectly elastic, (e = , -) perfectly inelastic, (e = 0) unitary elasticity, (e = 1, -1) inelastic, (-1<e<1) and elastic. (e<-1 or e>1)

x

xD P

De

x

demand-elasticities II.

factors determining demand-elasticities:

proportion of the good’s price in the consumer’s expenses

substitution closeness of the substitution goods’ price economic relations, cultural or consumption

habits, trends the time factor

Source: Kopányi Mihály: Mikroökonómia, KJK-Kerszöv, Budapest, 2002, 96. oldal

discounting

How the values of two or more different periods of time can be compared?

When do specific costs and benefits occur? In accordance with the methodology the costs and incomes

of different periods of time shall be discounted to the present time, i.e. the future values are multiplied with the appropriate power of the discount factor to have comparable values.

discount factor

present value

nn rDF

)1(

1

nnFV

rPV

)1(

1

externalities

externalities (i.e. external effects): unexpected extra profit or cost, which are realized for those participants who are out of the economic activity triggered them, and these participants have no influence on them

positive externalities negative externalities (chemical plant, health effects...,

building a prison)

externalities II.

the external effects can be analyzed with the help of these questions:

Which actors are affected by the specific measure / economic activity?

How significant are the specific impacts for the affected actors?

Which externalities shall be analyzed taking into account the former two points?

Shall and could the specified external effect somehow be monetized?

If yes, is there any method to analyze this or a similar problem?

internalizing the externalities

it is possible: by making compromises between the

partners (which can be effective in the case of small number of actors or interest groups only), and

by using legal instruments. The participants of the activity can be obliged to compensate the (negative) impacts affecting the outer actors with rules.(Positive external effects are not compensated generally)

important analysis methods

cost-benefit analysis (CBA) cost-effectiveness analysis (CEA) cost-consequence analysis (CCA) cost-utility analysis (CUA) risk analysis (risk evaluation)

risk-risk analysis (RRA)

cost-benefit analysis (CBA)

we count – and monetize if possible – every cost and benefit as impacts and compare them

it improves the efficiency of the comparison, if the utilities (benefits) and costs on the scale are expressed in a quantitative way

if the result is positive, i.e. the society realizes a positive net benefit because of the rule, the idea shall be carried out

components of the CBA

all the effects classified to be significant shall be presented

Benefits Costs

Direct (monetary) incomes

Direct (monetary) expenditures

Positive externalities Negative externalities

Losses not produced due to the rule Alternative costs

cost-effectiveness analysis (CEA)

Its area of usage is a bit tighter than the former one’s, because it is to compare alternatives, projects with the same or similar purpose

advantage: the less distortion compared with other methods (coming from the homogenization of the factors)

disadvantage: it can only be used in special cases, moreover it does not value the effectiveness of the rule

further analyses

CCA the costs and benefits of the possible alternatives are

calculated and then only a list of them is given does not give an unequivocal answer to the question

whether the specific measure comes with a positive or negative utility for the society

CUA the monetary and the alternative costs of the

implementation of the rule are on the cost side of the analyses, and the utilities described by indexes and measures go to the benefit side

risk analysis

risks and probabilities of the (supervention of the) impacts of a regulation

new and disappearing risks (e.g. green house effect)

It is very important during the impact assessments that the probability of specific events to happen shall not only be used as weighting coefficient considering the risks. It always shall be taken into consideration whether the higher risk factor ‘paid’ for the higher utility is acceptable or not.

risk-risk analysis (RRA)

coherences between different risks some rules can lower the specific risk on the

one hand, but they also possibly rise others on the other hand, and the total utility of the rule could fall below zero (e.g.: the regulation on civil aircraft operation and ground handling )

modeling

simplification of real economic and social processes to the appropriate level to be able to draw the conclusion concerning the real event

analysis of complex impact-mechanisms emphasis is on the modeling to the appropriate level able to draw the conclusion concerning the real event

scenario-modeling (-analysis)

the method makes a ‘competition’ between the models which differ only a bit from each other to achieve the specific goal optimally

comparison analyses

baseline-analysis it correlates the ‘new’ situation due to the

planned changes to the base situation shows what modifications will occur due to

the rule taking into account the costs and benefits, etc. as compared to the former situation

do-nothing shows what would happen if the regulation

stood unamended