Arguments are frequently made to the effect that if the benefits of a regulation exceed its costs, the regulation should promulgated. Here is a succinct statement as to why the aforementioned statement is flawed.
In a like manner with the advent of a regulatory budget, whose control mechanism is anchored in Theory of Optimal Delegation, benefit-cost analysis — while remaining as an important component of centralized regulatory review — will no longer play as dominant of a role as it has it has enjoyed in the past. This slightly diminished emphasis on benefit-cost analysis arises because the criterion for a rule having positive net benefits will be a necessary but not sufficient condition for inclusion in a Federal Regulatory Budget. Furthermore, the presence of a new macro control system opens the door for the use of different social welfare functions in the conduct of benefit-cost analyses.
With the advent of regulatory budgets, the US is moving toward a place where the tools and methodologies of benefit-cost analysis and welfare economics no longer dominate. Instead, the field of institutional economics provides the conceptual paradigm. Institutional economists study how institutions shape economic behavior. (p. 27)
A significant number of individuals continue to work on improving benefit-cost analysis and it is beyond the scope of this paper to address potential areas of inquiry. However, since it is unlikely that either the Pareto or Kaldor-Hicks criteria will be fulfilled in the immediate future, the adoption of all rules whose benefits exceed their costs will not maximize public welfare. Consequently, benefit-cost analysis as presently practiced needs to be augmented by other measures; a cornucopia of such measures is housed in the field of institutional economics. (p. 28)
The theory of optimal delegation addresses in a very direct manner the central issue dealing with the execution of a regulatory budget, namely a principal, the President, delegates authority to an agency, an agent who might not share the same priorities as does the President, to act in his or her behalf to formulate a regulatory budget subject to a financial cap established by the President. The theory of optimal delegation provides a metric for assessing the impact of a range of attributes used in the formulation of a regulatory budget such as the biases of the agent. (p. 32 )
Now some forty years subsequent to the recognition of the principle-agent dilemma [through the lens of the Theory of Optimal Delegation] it has a forceful presence in the initiation of a mechanism to control the size of the administrative state. (p. 34)
The full paper can be accessed here. (See also The Evolution of Benefit-Cost Analysis into Federal Rulemaking.)
Jim Tozzi served as a regulatory official in five consecutive presidential administrations starting with Lyndon Johnson and ending with Ronald Reagan. He is presently the head of the Center for Regulatory Effectiveness.