Maharashtra National Law University, Mumbai

Economics

Economic Analysis of Regulations

Synopsis

Vidit Harsulkar
2015-021
Semester V
INTRODUCTION

Every lawmaker is faced with two concerns: first, the question of how a specific law might affect
behavior and, second, whether this law secures its intended social goals. There is a need to move
from an intuitive, anecdotal and subjective analysis to employing a scientific theory to predict
these answers. This is what economics has to do with law.

The field of Law & Economics or the Economic Analysis of Law is concerned with this very
interface. It permits the greater use of economics to examine the law in addition to recognizing
the importance of law to an analysis of economic issues. Today, the field of Law and Economics
has expanded and transformed legal fields related to property, contracts, torts, crimes, procedure,
constitutional design, the environment, family matters etc. The inherent advantage of this field is
that its objective nature permits the legal system to function rationally and more efficiently.
Besides, it provides a useful normative standard for evaluating law and policy

After the last economic crisis, calls for more regulation, especially in financial markets, were
widespread both at the national and the international level. To avoid the occurrence of such
crisis, it is argued that more regulations are required. Regulations are indeed tools to shape
economic systems. As such, they have tremendous impacts on economic growth and the well-
being of population. If the content of regulations is to be known when strategies are considered,
it is especially crucial for both lawyers and policy makers to understand the foundations of these
regulations. For lawyers, it helps to develop innovative interpretations and powerful arguments;
for policy makers to understand the consequences and the inherent limits of their actions while
also providing tools to apprehend and criticize existing regulations. This course will inquire into
the reasons for regulations, the options that are available when a regulation is considered, their
limits and the strategies to deal with them.

The debate over the use of economic analysis as a tool in regulatory decision making has been
more than academic. Countries and states throughout the world require extensive use of cost
benefit analysis and related tools as a way of informing key regulatory decisions and reforming
the regulatory process. In the United States, for example, the regulatory oversight agency uses
cost-benefit analysis to both improve regulatory proposals and stimulate new regulatory
measures where the benefits exceed the costs.1

Economic analysis can be a powerful tool in informing regulatory decisions. Regulation uses a
sizable amount of resources, so it is relevant to ask whether the benefits of regulation are worth
the costs. As we will document, many regulations would not pass a benefit cost test, while others
could yield much higher net 68 Journal of Economic Perspectives benefits with appropriate
modifications. We readily acknowledge that benefit cost analysis faces limitations, such as
difficulties in placing a monetary value on certain key benefits and costs. We generally believe
that the regulatory process should use benefit cost analysis with benefits and costs stated in
quantitative terms and translated into monetary values where possible as an input into important
regulatory decisions. We would leave open the possibility that in particular cases, unquantifiable
costs or benefits may tip the balance of the decision.

RESEARCH HYPOTHESIS

Economic analysis of regulations tends to overstate benefits.

CHAPTERIZATION

1. INTRODUCTION
2. CONNECTING REGULATION AND ECONOMIC ANALYSIS
3. THE EFFECT OF ECONOMIC ANALYSIS IN THE REGULATORY PROCESS
4. CONCLUSION AND CRITICAL ANALYSIS

1
Robert W. Hahn and Cass R. Sunstein, Regulatory Policy Takes Exciting New Tack, (September 2001), available
at http://www. aei-brookings.org/policy/page.php?id=25
LITERATURE REVIEW

1. The Economic Analysis of Regulation: A Response to the Critics, The University of

Chicago Law Review, Vol. 71, No. 3, pp. 1021-1054, Summer 2004

This paper addresses the analytical concerns raised by the critics. It makes the following
four points: first, summary measures of the impacts of regulation have made important
contributions to our understanding of the regulatory process - a point often overlooked by
the critics; second, some of the suggestions made by the critics are legitimate, but many
are not; third, some of the critics' concerns could be addressed by making refinements to
the work that they find so objectionable; and finally, the solution to legitimate concerns
raised by the critics is not to eliminate quantitative economic analysis, but to gain a
deeper understanding of its strengths and weaknesses, and to use it wisely.

2. Market Reform and Controversial Regulatory Administration: Runaway Agents,

Political Ploys or Intended Effects?, Jrgen Grnnegaard Christensen and Nick
Sitter and Rune J. Srensen, presentation at the ECPR Conference.

The present paper reviews the normative and positive literature on independent
regulatory agencies, addressing why they have been deemed desirable and why they have
been established. The motive for establishing independent regulators is directly related to
how they are expected to operate, and in turn how they in actually operate. In contrast to
earlier suggestions that degrees of independence reflect the quest for efficient regulation,
or that they reflect compromises between commitments to credibility and political
oversight, the present paper suggests that regulatory reform may be driven other motives
as well. To some extent, regulatory independence reflects the degree to which politicians
seek to bind their successors or obfuscate the responsibility for risky decisions. If so, the
democratic challenge is deliberate institutional choices, not runaway agencies.
3. Has Economic Analysis Improved Regulatory Decisions?, Robert W. Hahn and Paul
C. Tetlock, Journal of Economic PerspectivesVolume 22, Number 1Winter
2008Pages 6784

This paper starts by describing how benefitcost analyses are done. It will then bring
some news that may be welcome to economists seeking research topics, but unwelcome
to economists in their role as citizens. Despite the magnitude of the costs and benefits of
regulation, the quality of government analyses of regulation falls far short of basic
standards of economic research, and it does not appear to be getting any better over time.
Indeed, we do not even have answers to basic questions like whether benefit cost
analyses tend to overstate benefits, perhaps out of regulatory zeal, or whether they
overstate costs, perhaps because they fail to recognize how innovation will reduce the
costs after regulations are imposed. Furthermore, there is little evidence that economic
analysis of regulatory decisions has had a substantial positive impact. This is not to say
that economists have not had an impact in important areas, such as the deregulation of
airlines, but that economic analysis of run-of-the-mill billion-dollar regulations may not
be having much impact.

4. On the Economic Analysis of Regulations at Independent Regulatory Commissions,

Arthur Fraas and Randall Lutter, RFF Conference, April 7, 2011

The analysis conducted by the IRCs is generally the minimum required by statute. IRC
final rules generally address the requirements of the Regulatory Flexibility Act and the
Paperwork Reduction Act. In many instances the IRCs appear to be issuing major
regulations without reporting any quantitative information on benefits and costsapart
from the paperwork burdenthat would routinely be expected from executive branch
agencies covered by Executive Order 12866. Instead, they offer only a qualitative
discussion of the benefits and costs. The IRCs present this discussion without any formal
review of alternatives