Pareto Policy Solutions, LLC

advancing innovation through smart regulation

Pareto Policy Solutions, LLC is a policy analysis and advocacy firm committed to advancing sustainability through “smart” regulation: regulation that rewards, and does not penalize, superior performance.  Often, such actions leverage advances in science and technology and make the regulatory program itself more effective as well as more efficient.

The Opportunity Cost of Regulation

Sometimes when faced with a tough and complex decision, you may simplify the problem by asking yourself:  Which decision will I regret the least in the future? 

By asking ourselves to consider the foregone opportunity of a decision, we are focusing on what economists call opportunity cost.

This concept is powerful when thinking about a particular regulation.

Is there a better way to regulate that reduces cost but yields the same or greater net benefits? Is regulation diverting resources from a more productive activity?

We can also use the concept to identify regulations where opportunity costs are likely to be relatively large, indicating potential targets for regulatory reform.

Are regulatory agencies taking too long to approve new, life-saving products?  Are permit applications for major job-creating infrastructure projects being delayed unnecessarily?

President Obama has undertaken initiatives to reform outdated regulations, to harmonize international regulatory standards, and to streamline permitting for infrastructure projects.  By using opportunity cost as a compass, the President could make a real difference.  The Administration ought to make clear that opportunity cost is the guiding principle underpinning these initiatives.  

It wouldn't be the first time.  When President Obama stopped EPA from tightening the ozone standard years ago, he did so based primarily on the high opportunity cost.

And for Republicans in Congress who long for regulatory reform, the concept of opportunity cost can help shape their legislative proposals in ways that are likely to garner greater public support. 

To be fair, opportunity cost is no panacea.  The choice of regulation always involves tradeoffs: of different goods (e.g., greater environmental protection versus greater business investment), and of affected people (e.g., should we impose costs on Group A to benefit Group B?). 

Values matter, and values are debatable.  Which makes opportunity cost a tricky subject indeed.

Tricky as it may be, ignoring opportunity cost is not an option.  Regulation always involves opportunity cost, and we can deal with it either implicitly or explicitly, the former leading to unintended consequences we may regret later.

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