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

1. economic impact assessmentCosts, benefits, externalities, elasticity, discounting, methods of analysis(CBA, CEA, RRA), modeling, comparative analyses Krisztian Orban, Ministry of Justice, Hungary Regional Strategic Workshop on Impact Assessment Riga, Latvia 2-4 February, 2005 Organized by Open Society Institute and UNDP

2. 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

3. 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

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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)

11. 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)

12. 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

13. 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

14. 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)

15. 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

16. discounting • How the values of two or more different periods of timecan 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

17. 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)

18. 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?

19. 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)

20. 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)

21. 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

22. components of the CBA all the effects classified to be significant shall be presented

23. 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

24. 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

25. 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.

26. 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 )

27. 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

28. 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

29. 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