The growing concern about the cost-effectiveness of social regulations has spurred Senators Fred Thompson and Carl Levin to introduce legislation requiring federal regulatory agencies to conduct a cost-benefit analysis of every regulation with an annual economic impact greater than $100 million. But while this legislation appears to be a step in the right direction, it fails to address an issue that is even more important than the balancing of regulatory costs and benefits.
The fundamental economic criteria for evaluating any public policy is whether it maximizes social net benefits. Given that social regulations are, in principle, designed to reduce welfare losses caused by externalities or threats to human health and safety, the first step for regulators is to know whether the (alleged) market failure is sufficiently costly to justify government intervention and whether a proposed regulation is the most efficient way to correct the market failure.
The paper studies the regulatory battle over airplane noise to illustrate how addressing these questions can improve regulatory policy by targeting government action where it is needed. The 1990 Airport Noise and Capacity Act (ANCA) mandated the elimination of certain (Stage II) aircraft at all U.S. airports by the end of 1999. The ANCA therefore affected aircraft design and generated benefits to homeowners who live in areas affected by airplane noise, but it has also generated costs to airlines by reducing the economic life of their capital stock. Surprisingly, analysts have not addressed the basic question of whether the benefits of the ANCA, arguably the most important piece of airplane noise regulation to date, exceed its costs. Our own costbenefit analysis of the ANCA finds that its $5 billion (present discounted value) in benefits fall considerably short of its $10 billion costs.
More fundamentally, we find that the net benefits that could have been generated even by an economically optimal airplane noise tax amount to only $0.2 billion (present value). Just as the ANCA has done, an optimal noise policy would transfer wealth from airlines and travelers to homeowners—although to a much smaller extent. It appears that current FAA noise regulations have generated substantial costs to society when, in fact, there was little justification on efficiency grounds for any regulatory intervention in the first place. A solid analytical foundation for social regulation will preclude criticism of its costeffectiveness.