Ten Principles for Better Regulation

8/22/2019 Ten Principles for Better Regulation

1/26

Ten PrinciPles

for BeTTer regulaTion

BY JerrY ellig


2/26

Cpygh 2013 by Jey Ellgand he Mecau Cene a Gege Man Unvey

Mecau Cene

Gege Man Unvey3351 Fafax Dve, 4h Fl

Alngn, VA 22201-4433

(703) 993-4930

mecau.g


3/26

aBouT The auThor

Jerry Ellig is a senior research fellow at the Mercatus Center at

George Mason University and a former assistant professor of econom-

ics at George Mason University. He has published numerous articles ongovernment regulation and business management in both scholarly and

popular periodicals, including the Wall Street Journal, theNew York

Times, the Washington Post, theAdministrative Law Review, and the

Journal of Regulatory Economics. His most recent book, coauthored

with Maurice McTigue and Henry Wray, is Government Performance

and Results: An Evaluation of GPRAs First Decade. Previously, Ellig was

deputy director and acting director of the Office of Policy Planning atthe Federal Trade Commission (FTC). He also served as senior econ-

omist for the Joint Economic Committee of the US Congress. Ellig

received his MA and PhD in economics from George Mason University.


4/26


5/26

1

For nearly fourdecades, presidential administrationshave required executive branch regulatory agencies to

identify the problem they are trying to address and assess

its significance, examine a wide range of alternative solutions, esti-

mate the costs and benefits of the alternatives, and regulate only

when the benefits justify the costs. In 1993, President Clintons

Executive Order 12866 laid out the fundamental requirements

that have governed regulatory analysis and review ever since.1

In January 2011, President Obamas Executive Order 13563 reaf-

firmed the principles and processes articulated in the Clinton

executive order:

Our regulatory system must protect public health,

welfare, safety, and our environment while promoting

economic growth, innovation, competitiveness, andjob creation. It must be based on the best available sci-

ence. It must allow for public participation and an open

exchange of ideas. It must promote predictability and

reduce uncertainty. It must identify and use the best,

most innovative, and least burdensome tools for achiev-

ing regulatory ends. It must take into account benefits

1. Executive Order 12866,Federal Register 58, no. 190 (1993): 5173544, http://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo12866_10041993.pdf.
http://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo12866_10041993.pdfhttp://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo12866_10041993.pdfhttp://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo12866_10041993.pdfhttp://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo12866_10041993.pdfhttp://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo12866_10041993.pdfhttp://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo12866_10041993.pdf


6/26

2 Ten P r i n ci P l es f or BeTTer r eg ul aTi on

and costs, both quantitative and qualitative. It must

ensure that regulations are accessible, consistent, writ-

ten in plain language, and easy to understand. It must

measure, and seek to improve, the actual results of regu-latory requirements.2

Regulations, regulatory impact analyses (RIAs), and notices

of proposed rulemaking (NPRMs) that reflect the following 10

principles have the best chance of accomplishing these goals.

Regulatory agencies are permitted to follow these principles only

to the extent that they do not conflict with the laws the agenciesimplement, so it would also behoove Congress to keep these prin-

ciples in mind when it writes regulatory legislation.

1. Since regulations impose constraints that govern peoples

behavior, a sensible regulation should solve a real, widespread

problem that could reasonably be addressed by altering con-straints. It should not just respond to anecdotes of bad behav-

ior by bad actors.

The very first principle enunciated in Executive Order

12866 is that each agency shall identify the problem that

it intends to address (including, where applicable, the

failures of private markets or public institutions that war-

rant new regulatory action) as well as assess the signifi-cance of that problem.3

2. Executive Order 13563,Federal Register 76, no. 11 (January 21, 2011): 382123,http://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo13563_01182011.pdf.

3. Ibid., sec. 1(b)(1). Market failure and government failure are both pieces of

economic terminology that have specific meanings; they indicate situations whenmarkets or the government fails to produce economically efficient results, for sev-eral well-defined reasons. For a highly readable and brief description, see SusanE. Dudley and Jerry Brito,Regulation: A Primer, 2nd ed. (Arlington, VA: MercatusCenter at George Mason University and George Washington University RegulatoryStudies Center, 2012), 1220.
http://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo13563_01182011.pdfhttp://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo13563_01182011.pdfhttp://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo13563_01182011.pdfhttp://www.whitehouse.gov/sites/default/files/omb/inforeg/eo12866/eo13563_01182011.pdf


7/26

JERRY ELLIG 3

Itmakessensethatthisisthefirstprinciple.Beforeregu-

lating,regulatorsshouldascertainwhethertheyaredeal-

ingwithasystemicproblemthatregulationcouldsolve.

Andunderstandingthenatureoftheproblemisvitaltocraftingasolutionthatwillactuallywork.

CircularA-4,theOfficeofManagementandBudget

(OMB)guidanceonregulatoryanalysisforagencies,

elaboratesfurther:

Iftheregulationisdesignedtocorrectasignificant

marketfailure,youshoulddescribethefailureboth

qualitativelyand(wherefeasible)quantitatively....

Forotherinterventions,youshouldalsoprovidea

demonstrationofcompellingsocialpurposeandthe

likelihoodofeffectiveaction.Althoughintangible

rationalesdonotneedtobequantified,theanalysis

shouldpresentandevaluatethestrengthsandlimi-

tationsoftherelevantargumentsfortheseintan-

giblevalues.4

Agenciesoftenfailtoadequatelyidentifyorthoroughly

analyzeasystemicproblem.TheMercatusCenters

RegulatoryReportCardassessestheextenttowhich

agencyRIAscomplywiththemajorprinciplesin

ExecutiveOrder12866andCircularA-4.5Assessmentof

thesystemicproblemistheregulatoryanalysiscriterion

thatearnedthelowestscoreontheRegulatoryReport

CardinboththeBushandObamaadministrations.6

4.OfficeofManagementandBudget(OMB),CircularA-4,September17,2003,p.4,availableathttp://www.whitehouse.gov/omb/circulars_a004_a-4.

5.RegulatoryReportCardevaluationsofeconomicallysignificantregulationspro-posedsince2008areavailableathttp://mercatus.org/reportcard.

6.JerryEllig,PatrickA.McLaughlin,andJohnF.MorrallIII,Continuity,Change,andPriorities:TheQualityandUseofRegulatoryAnalysisAcrossUSAdministrations,Regulation & Governance7,no.2(2012):161,availablewithregistrationathttp://onlinelibrary.wiley.com/doi/10.1111/j.1748-5991.2012.01149.x/full.
http://www.whitehouse.gov/omb/circulars_a004_a-4http://mercatus.org/reportcardhttp://onlinelibrary.wiley.com/doi/10.1111/j.1748-5991.2012.01149.x/fullhttp://onlinelibrary.wiley.com/doi/10.1111/j.1748-5991.2012.01149.x/fullhttp://onlinelibrary.wiley.com/doi/10.1111/j.1748-5991.2012.01149.x/fullhttp://onlinelibrary.wiley.com/doi/10.1111/j.1748-5991.2012.01149.x/fullhttp://mercatus.org/reportcardhttp://www.whitehouse.gov/omb/circulars_a004_a-4


8/26


BEst PrACtiCE Worst PrACtiCE

An riA explcly defne a falue

f make nun, a falue f

gvenmen nun, an ve-

dng cal need

A ulemakng mply ce an

auhzng aue, pvdng lle

n defnn f he pblem he

ulemakng nend adde

An riA ulne a hey f caue

and effec ha explan why he

make gvenmen may have

faled, why he cal need may

be me nuff cenly

An riA NPrM defne he pb-

lem a he abence f a ule

An riA peen empcal evdence

ha he pblem acually ex and wdepeadn ju anecdal

An riA NPrM peen anecde

f bad behav, bu n evdence fhw wdepead he behav

Note: For examples of actual RIAs that illustrate best and worst practices, see Jerry Ellig and James

Broughel, Regulation: Whats the Problem? (Mercatus on Policy, Mercatus Center at George

Mason University, Arlington, VA, November 2011), http://mercatus.org/sites/default/files/Ellig

_broughel_Regulationwhatstheproblem.pdf.

2. A regulation should be accompanied by proof that it is likely

to make life better for citizens in a significant and tangible way. Regulators should specify the ultimate outcomes that

benefit citizensnot just inputs, activities, or processes.

Circular A-4 notes, In constructing measures of effec-

tiveness, final outcomes, such as lives saved or life-years

saved, are preferred to measures of intermediate results,

such as tons of pollution reduced, crashes avoided, or

cases of disease avoided.7

Circular A-4 further instructs agencies, Explain how the

actions required by the rule are linked to the expected

benefits. For example, indicate how additional safety

equipment will reduce safety risks.8

Good intentions are not proof that a regulation will

achieve the desired results. Executive Order 12866 states,

7. OMB, Circular A-4, p. 12.

8. Ibid., 2.
http://mercatus.org/sites/default/files/Ellig_broughel_Regulationwhatstheproblem.pdfhttp://mercatus.org/sites/default/files/Ellig_broughel_Regulationwhatstheproblem.pdfhttp://mercatus.org/sites/default/files/Ellig_broughel_Regulationwhatstheproblem.pdfhttp://mercatus.org/sites/default/files/Ellig_broughel_Regulationwhatstheproblem.pdf


9/26

JerrY ellig 5

Each agency shall base its decisions on the best reason-

ably obtainable scientific, technical, economic, and other

information concerning the need for, and consequences

of, the intended regulation.9 In other words, regulationrequires evidence, not just assertions.

In the Mercatus Centers Regulatory Report Card, agen-

cies receive a better score for analyzing outcomes than

for other aspects of regulatory analysis. Nevertheless, the

average score for analysis of outcomes is just 3.2 out of 5

possible points for regulations proposed in 20082012.10


An riA and NPrM defne he

nended eul a ucme ha

clealy mpve czen qualy f

lfe

An riA NPrM defne he gal

a acve (e.g., adpn f a

ule, mpved enfcemen f an

exng ule law) upu

(e.g., me enfcemen acn,

educed emn) whu den-fyng he pped egulan

ulmae effec n peple lve

An riA ffe a hey f caue and

effec , cnen wh eablhed

ecnmc and cenfc hee, ha

hw hw he egulan culd p-

duce he deed ucme

An riA ffe n hey f caue

and effec hwng hw he egu-

lan culd pduce he deed

ucme, he hey nc-

heen, elf-cnadcy

An riA peen empcal evdence

ha each ep f he hey lkely

be cec, nllng cnfdence

ha he egulan lkely p-

duce he deed ucme

An riA mply aume he egu-

lan wll pduce he nendeducme whu pvdng any

evdence upp h aump-

n; egad gd nenn a

uffcen pduce gd eul

Note: For an example of an RIA that illustrates both some of the best and some of the worst prac-

tices, see the discussion of the Occupational Safety and Health Administrations rule on cranes and

derricks in Jerry Ellig and Patrick A. McLaughlin, The Quality and Use of Regulatory Analysis in

2008,Risk Analysis 32, no. 5 (May 2012): 78.

9. Executive Order 12866, sec. 1(b)(7).

10. Jerry Ellig, Improving Regulatory Impact Analysis through Process Reform,testimony before the Joint Economic Committee, June 26, 2013, p. 4.


10/26


3. Regulators should define how they will know the problem is

solved and no additional regulation is necessary.

Presidents periodically require agencies to develop plans

for retrospective review of existing regulations.11

The Government Accountability Office and independent

scholars have found that few agencies engage in genuine

retrospective analysis of regulationsthat is, evaluations

to ascertain the actual benefits and costs of regulations

after they have been implemented.

12

Agencies could greatly facilitate this kind of retrospective

review by clearly explaining, when a regulation is imple-

mented, what counts as success. When will the problem

be considered solved? When will the proposed regulation

no longer be necessary, or when will no additional regula-

tion be necessary?

In the Mercatus Centers Regulatory Report Card, two ofthe criteria for which agencies earn the lowest scores are

assessing whether they have articulated goals and mea-

sures to gauge the results of the regulation and indicating

what data they will use to evaluate the regulations results

after it is adopted.13

11. Executive Order 12044,Federal Register 43 (March 24, 1978), sec. 4, http://www.presidency.ucsb.edu/ws/index.php?pid=30539; Executive Order 12291,FederalRegister 46 (February 17, 1981), sec. 3i, http://www.archives.gov/federal-register/codification/executive-order/12291.html; Executive Order 12866, sec. 5; ExecutiveOrder 13563, sec. 1.

12. U.S. Government Accountability Office, Re-examining Regulations:Opportunities Exist to Improve Effectiveness and Transparency of Retrospective

Reviews, Report GAO-07-791 (2007); Randall Lutter, The Role of RetrospectiveAnalysis and Review in Regulatory Policy (Working Paper No. 12-14, MercatusCenter at George Mason University, Arlington, VA, April 2012), http://mercatus.org/sites/default/files/Lutter_Retrospective_v1-2.pdf.

13. Ellig, Improving Regulatory Impact Analysis, 4.
http://www.presidency.ucsb.edu/ws/index.php?pid=30539http://www.presidency.ucsb.edu/ws/index.php?pid=30539http://www.archives.gov/federal-register/codification/executive-order/12291.htmlhttp://www.archives.gov/federal-register/codification/executive-order/12291.htmlhttp://mercatus.org/sites/default/files/Lutter_Retrospective_v1-2.pdfhttp://mercatus.org/sites/default/files/Lutter_Retrospective_v1-2.pdfhttp://mercatus.org/sites/default/files/Lutter_Retrospective_v1-2.pdfhttp://mercatus.org/sites/default/files/Lutter_Retrospective_v1-2.pdfhttp://www.archives.gov/federal-register/codification/executive-order/12291.htmlhttp://www.archives.gov/federal-register/codification/executive-order/12291.htmlhttp://www.presidency.ucsb.edu/ws/index.php?pid=30539http://www.presidency.ucsb.edu/ws/index.php?pid=30539


11/26

JerrY ellig 7


An riA clealy ndcae he ze fhe pblem, and he benef calcula-

n hw hw much f he pblem

he egulan lkely lve

An riA epea he ame ac

n he ze f he pblem ha

wee ued jufy he egula-n amed a he ame pblem,

uggeng ha he agency neve

updaed aemen f he

pblem eflec he effec f

he egulan

An riA NPrM pecfe a baelne

agan whch he agency wll mea-

ue benef and c n he fuue

and ndcae wha eul wll be

cndeed a ucce a falue

An agency cmm n gal

meaue f he egulan

An NPrM clealy ndcae ha he

agency wll ae he benef and

c f he egulan a me ea-

nable me afe mplemened

An agency de n cmm

any evaluan f he egulan

effec afe mplemened

An riA NPrM ndcae wha daa

he agency ha acce wll cm-

m gahe f h aemen

the daa n he riA ae pae

ha n even clea hw he

agency culd pjec he benef

c, much le ae hem

afe he egulan mplemened

4. Regulators should consider alternatives to regulation and

alternative forms of regulation.

Executive Order 12866 indicates that agencies should

consider a variety of alternative solutions to the problem

identified, including performance standards, economicincentives, provision of information, modification of

existing regulations or laws, and not regulating.14

Circular A-4 provides a broader list of alternatives,

such as fees, bonds, insurance, changes in liability

rules, definition or redefinition of property rights, and

information provision or disclosure.15 It also directs

14. Executive Order 12866, secs. 1(a), 1(b)(2), 1(b)(3), 1(b)(8).

15. OMB, Circular A-4, pp. 89.


12/26


agencies to consider alternatives outside the scope of

current law, in order to inform congressional delibera-

tions under the Congressional Review Act.16

Regulatory scholars suggest an even broader range of

alternatives that can be effective in some situations, such

as agencies requiring firms to analyze and plan for poten-

tial hazards or risks, or firms voluntarily adopting stan-

dards at the behest of customers or suppliers.17

In reality, agencies rarely consider innovative alterna-

tives. One agency economist notes, We do what we

always do, just trotting out the same old thing. Thats why

we dont come up with better regulations; we just come

up with the same regulations in different areas.18

16. Ibid., 17.

17. Cary Coglianese and David Lazer, Management-Based Regulation: PrescribingPrivate Management to Achieve Public Goals,Law & Society Review 37, no. 4(December 2003): 691730; Aseem Prakash and Matthew Potoski, Racing to theBottom? Trade, Environmental Governance, and ISO 14001,American Journal of

Political Science 50, no. 2 (April 2006): 35064.

18. Richard Williams, The Influence of Regulatory Economists in Federal Healthand Safety Agencies (Working Paper No. 08-15, Mercatus Center at GeorgeMason University, Arlington, VA, July 2008), 6, http://mercatus.org/sites/default/files/publication/WP0815_Regulatory%20Economists.pdf.
http://mercatus.org/sites/default/files/publication/WP0815_Regulatory%20Economists.pdfhttp://mercatus.org/sites/default/files/publication/WP0815_Regulatory%20Economists.pdfhttp://mercatus.org/sites/default/files/publication/WP0815_Regulatory%20Economists.pdfhttp://mercatus.org/sites/default/files/publication/WP0815_Regulatory%20Economists.pdf


13/26

JerrY ellig 9


regula cnde alenave

fedeal egulan, uch a nfma-

n pvn, lably hugh helegal yem, ae egulan, he

pbly ha he evlvng make-

place wll lve he pblem

An riA and NPrM fal cndealenave fedeal egulan

regula cnde a wde vaey

f alenave egulay appache

An riA NPrM ffe alena-

ve ha meely weak he faved

egulay appach

An riA cmpehenvely aee

he benef and c f a wde va-

ey f alenave lun

An riA NPrM ffe a cuy

dcun f alenave whu

appeang euly cndehem

Note: For examples from actual Regulatory Impact Analyses of best and worst prac-

tices in the analysis of alternatives, see Jerry Ellig and James Broughel, Regulatory

Alternatives: Best and Worst Practices (Mercatus on Policy, Mercatus Center at George

Mason University, Arlington, VA, February 2012), http://mercatus.org/sites/default/files

/RegulatoryAlternativesElligBroughel2-21-12.pdf.

5. The regulatory alternative selected should provide the big-gest bang for the buck.

Executive Order 12866 directs agencies to select those

approaches that maximize net benefits . . . unless a stat-

ute requires another regulatory approach19 and pro-

pose or adopt a regulation only upon a reasoned determi-

nation that the benefits of the intended regulation justify

its costs.20

Agencies are explicitly permitted to consider unquanti-

fied benefits or costs, as well as other values that are nei-

ther benefits nor costs, including equity, human dignity,

fairness, and distributive impacts.21

19. Executive Order 12866, sec. 1(a).

20. Ibid., sec. 1(b)(6).

21. Executive Order 13563, sec. 1(c).
http://mercatus.org/sites/default/files/RegulatoryAlternativesElligBroughel2-21-12.pdfhttp://mercatus.org/sites/default/files/RegulatoryAlternativesElligBroughel2-21-12.pdfhttp://mercatus.org/sites/default/files/RegulatoryAlternativesElligBroughel2-21-12.pdfhttp://mercatus.org/sites/default/files/RegulatoryAlternativesElligBroughel2-21-12.pdf


14/26


During 20082012, agencies chose the alternative that

maximized net benefits or explained why they chose

another option for just 33 percent of proposed, economi-

cally significant prescriptive regulations.22

Analysis of values other than benefits and costs is

particularly sparse. For example, in the first round of

regulations implementing the Patient Protection and

Affordable Care Act, the RIAs characterized various

results of the regulations as improvements in equity

without ever defining equity or explaining how the

regulation improved it.23

22. The percentage is calculated from the Mercatus Centers Regulatory ReportCard data, available at http://mercatus.org/reportcard. These are the prescrip-tive regulations that received a score of 4 or 5 points (out of a possible 5) on thequestion whether the agency chose the alternative that maximized net benefits orexplained its reasons for choosing another alternative. A total of 36 out of 108 pre-scriptive regulations received a score of 4 or 5 in 20082012. A prescriptive reg-ulation is a regulation that imposes mandates or prohibitions.

23. Christopher J. Conover and Jerry Ellig, Beware the Rush to Presumption,Part A: Material Omissions in Regulatory Analyses for the Affordable Care ActsInterim Final Rules (Working Paper No. 12-01, Mercatus Center at GeorgeMason University, Arlington, VA, January 2012), 2125, http://mercatus.org/sites/default/files/publication/Beware_the_Rush_to_Presumption_PartA _ConoverEllig.pdf.
http://mercatus.org/reportcardhttp://mercatus.org/sites/default/files/publication/Beware_the_Rush_to_Presumption_PartA_ConoverEllig.pdfhttp://mercatus.org/sites/default/files/publication/Beware_the_Rush_to_Presumption_PartA_ConoverEllig.pdfhttp://mercatus.org/sites/default/files/publication/Beware_the_Rush_to_Presumption_PartA_ConoverEllig.pdfhttp://mercatus.org/sites/default/files/publication/Beware_the_Rush_to_Presumption_PartA_ConoverEllig.pdfhttp://mercatus.org/sites/default/files/publication/Beware_the_Rush_to_Presumption_PartA_ConoverEllig.pdfhttp://mercatus.org/sites/default/files/publication/Beware_the_Rush_to_Presumption_PartA_ConoverEllig.pdfhttp://mercatus.org/reportcard


15/26

JerrY ellig 1 1


An riA cmpehenvely aee

he benef and c f a wdevaey f alenave lun

An riA ffe a cuy dcun

f alenave ha d n appea

be euly cndeed meelyweak he eleced egulay

appach

An agency elec he alenave

ha maxmze ne benef, or

An riA ncmplee ha he ne

benef f alenave ae unclea

if he agency de n elec he

alenave ha maxmze ne ben-

ef, peen a clea, evdence-

baed explanan f he fac

ha mvaed decn

An NPrM ce unquanfed ben-

ef c a a mvan f he

decn whu peenng ev-

dence ha hee benef c

ae eal and ha he egulan wllaffec hem

if value he han benef

c (uch a equy) mvaed

he decn, he agency clealy

defne he value and peen

evdence ha he egulan wll

ubanally advance he value

An NPrM meely ae ha he

egulan jufed becaue

advance a value ha nly vaguely

defned, and he agency peen n

evdence ha he egulan wll n

fac advance ha value

Note: For examples from actual regulations of best and worst practices in the analysis of alterna-

tives, see Jerry Ellig and James Broughel, How Well Do Federal Agencies Use Regulatory ImpactAnalysis? (Mercatus on Policy, Mercatus Center at George Mason University, Arlington, VA, July

2013), http://mercatus.org/sites/default/files/Ellig_FedAgenciesRIA_MOP_071513.pdf.

6. Regulation should respect consumers freedom of choice.

Executive Order 12866 rightly focuses regulatory agen-

cies attention on remedying failures of market or govern-

ment institutions that allow people to harm each other,rather than trying to correct every mistake fallible indi-

viduals might make that harms themselves.24 The govern-

ment is more likely to be able to remedy institutional fail-

ures than to change fundamentally peoples preferences

or decision-making methods. Experimental evidence

shows that market institutions often produce sensible

results even when individuals appear to be behaving

http://mercatus.org/sites/default/files/Ellig_FedAgenciesRIA_MOP_071513.pdfhttp://mercatus.org/sites/default/files/Ellig_FedAgenciesRIA_MOP_071513.pdf


16/26


irrationally.25 Focusing on institutions also helps regu-

lators avoid a tempting analytical error: when people

appear to be making irrational decisions, they may be

doing so because they see some source of value that theregulatory analyst did not think to include in the analysis.

When individual irrationality is proffered as a justifica-

tion for regulation, there is no reason not to apply the

same evidence-based standard of analysis that applies to

other claims of market or government failure. The agency

should have actual empirical evidence of irrational con-

sumer decisions based on a study of consumer behavior inthe market that would be affected by the regulation, not

just speculation, analogies, or anecdotes.

Executive Order 12866 also specifies that a regulation

should be no more restrictive than necessary to correct

the problem the agency identified. It directs each agency

to consider a wide variety of alternatives (including eco-

nomic incentives and information provision),26 design its

regulations in the most cost-effective manner to achieve

the regulatory objective,27 and tailor its regulations to

impose the least burden on society.28

Nevertheless, many significant regulations assume,

without rigorous evidence, that individualsand some-

times businessesmake the wrong decisions because

they have irrational preferences. Most of the ben-

efits ascribed to energy-efficiency and fuel-efficiency

standards, for example, stem from the assumption that

for many people, the value of future cost savings from

25. Vernon L. Smith, The Contrast Between Economics and Psychology,Journalof Political Economy 99, no. 4 (August 1991): 87797.


27. Ibid., sec. 1(b)(5).

28. Ibid., sec. 1(b)(11).


17/26

JerrY ellig 13

reduced energy usage is lower than the regulatory agen-

cys analysts think is rational. The RIAs have not tested an

alternative, equally plausible explanation: that consumer

decisions reflect some aspect of quality that the analysthas not taken into account. The bulk of the estimated

benefits for these regulations come from correcting these

irrational choices, not from reduced pollution.29

Other regulations limit consumer choice in ways that

are broader than necessary to fix the genuine problem. If

consumers lack information or process it incorrectly, the

appropriate remedy is not to ban products or services, butrather to make the relevant information available or pro-

vide it in ways that are more understandable. As Circular

A-4 notes, A regulatory measure to improve the avail-

ability of information, particularly about the concealed

characteristics of products, provides consumers a greater

choice than a mandatory product standard or ban.30

29. See Ted Gayer and W. Kip Viscusi, Energy Regulations: Protecting IrrationalConsumers from Themselves? (Research Summary, Mercatus Center at GeorgeMason University, Arlington, VA, August 1, 2012), http://mercatus.org/sites/default/files/Energy-Regulations-Protecting-Irrational-Consumers-From

-Themselves.pdf; and Michael L. Marlow and Sherzod Abdukadirov, Fat Chance:An Analysis of Anti-obesity Efforts (Working Paper No. 12-10, Mercatus Center atGeorge Mason University, Arlington, VA, March 2012), http://mercatus.org/sites/default/files/publication/Fat_Chance_MarlowAbdukadirov_WP1210_0.pdf.

30. OMB, Circular A-4, p. 9.
http://mercatus.org/sites/default/files/Energy-Regulations-Protecting-Irrational-Consumers-From-Themselves.pdfhttp://mercatus.org/sites/default/files/Energy-Regulations-Protecting-Irrational-Consumers-From-Themselves.pdfhttp://mercatus.org/sites/default/files/Energy-Regulations-Protecting-Irrational-Consumers-From-Themselves.pdfhttp://mercatus.org/sites/default/files/publication/Fat_Chance_MarlowAbdukadirov_WP1210_0.pdfhttp://mercatus.org/sites/default/files/publication/Fat_Chance_MarlowAbdukadirov_WP1210_0.pdfhttp://mercatus.org/sites/default/files/publication/Fat_Chance_MarlowAbdukadirov_WP1210_0.pdfhttp://mercatus.org/sites/default/files/publication/Fat_Chance_MarlowAbdukadirov_WP1210_0.pdfhttp://mercatus.org/sites/default/files/Energy-Regulations-Protecting-Irrational-Consumers-From-Themselves.pdfhttp://mercatus.org/sites/default/files/Energy-Regulations-Protecting-Irrational-Consumers-From-Themselves.pdfhttp://mercatus.org/sites/default/files/Energy-Regulations-Protecting-Irrational-Consumers-From-Themselves.pdf


18/26

14 Ten P r i n ci P l es f or BeTT er r eg ul aTi on


the benef clamed n an riA

em fm he cecn f

genune nunal falue, nmeely he cecn f cnum-

e anal decn

M f a egulan clamed ben-

ef em fm he fac ha he

agency aume wh lle n ev-dence ha peple have he wng

pefeence

the agency egulae pec

cnume nly f cnume ae

vulneable mnply, ae ply

nfmed, make decn ha

mpe gnfcan c n hd

pae

the egulan vede cnume

feedm f chce by mandang

bannng a pduc, evce, fea-

ue, even hugh cnume ae ea-

nably well nfmed and expeence

all alm all he benef and c

f he decn

the riA NPrM upp clam

ha cnume lack nfman

pce ncecly by empcal

eeach n he make ha wuld

be affeced by he egulan

the riA NPrM heze ha cn-

ume lack nfman pce

nfman ncecly, bu pvde

n empcal evdence ha h ue

the egulan mpe a emedy

ha n me ecve han

neceay cec a well-

dcumened pblem; f exam-

ple, cec cnume lackf nfman by mpvng cn-

ume nfman

the egulan mpe a emedy

ha much me ecve han

neceay fx an denfed falue

f pvae make; f example, mandae ban a pduc becaue

cnume lack adequae nfman

7. Regulation should be technologically neutral.

Regulation should focus on establishing performance

goals that create tangible results for the publicnot pick-ing the means by which businesses, states, local govern-

ments, or individuals have to achieve those results.

Executive Order 12866 reflects this concern: Each agency

shall identify and assess alternative forms of regulation

and shall, to the extent feasible, specify performance

objectives, rather than specifying the behavior or manner

of compliance that regulated entities must adopt.31



19/26

JerrY ellig 15

It also instructs agencies to consider the alternative of

providing economic incentives for desired behavior, such

as user fees or marketable permits.32

But actual regulatory policy often picks winners and los-

ers by favoring some technologies over others. Federal

spectrum policy, for example, has for decades favored

certain technologies over others (such as broadcast over

broadband), instead of merely preventing signal inter-

ference and requiring all users of spectrum to bid for it

so that spectrum can be allocated to the uses consumers

value most highly.33


A egulan eablhe an bjec-

ve ahe han mandang he

mehd f cmplance

A egulan eque a pacula

mehd f cmplance

the bjecve pven pduce

gnfcan publc benef pe-

ven gnfcan publc ham

An agency defne egulay

bjecve a cmplance, whu

any lnk benef f he publc

wh a lnk beween cmplance and

benef ha peculave

All penal ue f a fedeally

managed euce have he pp-

uny bd f ue, egadle

f he echnlge bune

mdel

regula plan he develpmen

f echnlge bune mdel

and allcae fedeal euce

cay u he vn

8. Regulation should be competitively neutral.

Regulation should focus on creating tangible benefits for

the publicnot on singling out particular competitors to

be winners or losers.

32. Ibid., sec. 1(b)(3).

33. Thomas W. Hazlett, Liberalizing US Spectrum Allocation, Telecommuni-cations Policy 27 (2003): 48599.


20/26


TheemphasisinExecutiveOrder12866onperformance

objectivesandeconomicincentives 34helpsfacilitate

regulationthatiscompetitivelyneutralaswellastechno-

logicallyneutral.

Theanalysisofeffectsonsmallbusinessesrequired

undertheRegulatoryFlexibilityActreflectsaconcern

thatregulatoryburdenscoulddisproportionatelydisad-

vantagesmallbusinesses,tothebenefitoftheirlarger

competitors.

Well-knowneconomicresearchdemonstrateshowregu-

lationcanentrenchsomebusinessesattheexpenseof

competitorsandconsumers.35Themostobviousexam-

pleswerethegovernment-enforcedcartelsinthetrans-

portationandsecuritiesindustries,whichwerelargely

dismantledbyabipartisancongressionalcoalitioninthe

late1970s.36Butevenwell-intentionedsocialregulation

canharmconsumersbyshieldingsomefirmsinanindus-

tryfromcompetition.37

Thedebateoverpublicsafetycommunicationsprovides

astrikingexample.Morethanadecadeafter9/11,the

FCCstillhasnotmanagedtoenableconstructionofa

publicsafetycommunicationsnetworkthatwouldallow

allfirstresponderstocommunicatewitheachother.The

reasonisthattheFCCtriedtocreateasinglemonopoly

providergovernedbyapoliticallyappointedcommittee,

34.ExecutiveOrder12866,secs.1(b)(8)and1(b)(3).

35.Forasummaryofrelevanteconomicresearch,seeMatthewMitchell,ThePathologyofPrivilege:TheEconomicConsequencesofGovernmentFavoritism(MercatusResearch,MercatusCenteratGeorgeMasonUniversity,Arlington,VA,July9,2012),http://mercatus.org/sites/default/files/The_Pathology_of_Privilege

-Final_2.pdf.36.CliffordWinston,EconomicDeregulation:DayofReckoningforMicro-economists, Journal of Economic Literature31(September1993):126389.

37.BruceYandle,BootleggersandBaptists:TheEducationofaRegulatoryEconomist,Regulation7(May/June1983):1216.
http://mercatus.org/sites/default/files/The_Pathology_of_Privilege-Final_2.pdfhttp://mercatus.org/sites/default/files/The_Pathology_of_Privilege-Final_2.pdfhttp://mercatus.org/sites/default/files/The_Pathology_of_Privilege-Final_2.pdfhttp://mercatus.org/sites/default/files/The_Pathology_of_Privilege-Final_2.pdf


21/26

JerrY ellig 17

instead of simply auctioning public safety spectrum to

competing providers and requiring that their networks

be interoperable.38


regula avd mpng pce

cnl qua n cmpeve

make and avd ceang ba-

e eny ha nhb new cm-

pen

A egulan explcly ba new

fm fm eneng a make and/

enfce cael

A egulan eablhe an bjec-

ve, bu leave all cmpefee fnd way f meeng he

bjecve

regula y degn engneehe cean f a new fm nduy

An riA dcumen c cn-

ume ha ae when a egulan

ceae make pwe, and egula-

ake hee c n accun

when hey make decn

regula gne c cnum-

e ha ae when a egulan ce-

ae make pwe

9. Regulation should be based on the best available evidence,

not merely on assumptions, good intentions, or wishes.

Executive Order 12866 directs agencies to base their deci-

sions on the best reasonably obtainable scientific, techni-

cal, economic, and other information concerning the need

for, and consequences of, the intended regulation.39

Regulatory analysis is about understanding reality as it

is, not as regulators wish it to be. To provide an accurate

understanding of reality, a good regulatory analysis must

start with facts and evidence, not arbitrary assumptions.

38. Jerry Brito, Sending Out an SOS: Public Safety Communications Interopera-bility as a Collective Action Problem, Federal Communications Law Journal 59,no. 3 (March 2007): 45792, http://mercatus.org/uploadedFiles/Mercatus/Publications/Sending%20Out%20an%20S.O.S.pdf.

http://mercatus.org/uploadedFiles/Mercatus/Publications/Sending%20Out%20an%20S.O.S.pdfhttp://mercatus.org/uploadedFiles/Mercatus/Publications/Sending%20Out%20an%20S.O.S.pdfhttp://mercatus.org/uploadedFiles/Mercatus/Publications/Sending%20Out%20an%20S.O.S.pdfhttp://mercatus.org/uploadedFiles/Mercatus/Publications/Sending%20Out%20an%20S.O.S.pdf


22/26


Nevertheless, many authors of regulations and decision

makers believe that economists and other regulatory ana-

lysts can construct an analysis justifying any decision by

making assumptions plucked from thin air. One formerFDA economist elaborates:

When FDA was promulgating the seafood Hazard

Analysis Critical Control Points (HACCP) regulation,

it was obvious to both epidemiologists and econo-

mists from the beginning that there would be very few

benefits. . . . Later on, when it became apparent that

the costs were higher than benefits by about 10 to 1,the pressure was put on me as the chief economist to

change the numbers. At one point, on a Friday, I was

told not to bother coming back to work if I could not

agree to change the benefits and costs.

After the initial estimates showed very few bene-

fits, the dictated solution from senior managers was to

allow two scientists (one retiring and another from acompletely different agency who was unfamiliar with

the details of the rule) to estimate that 50 percent of

all illnesses caused by seafood would decrease follow-

ing imposition of the rulean estimate that has not

come true.40

Regulatory Report Card data show that for 108 prescrip-

tive regulations proposed in 20082012, 34 percent failedto document at least some data sources, and 33 percent

cited no research supporting the models or assumptions

used in the analysis.41

40. Williams, Influence of Regulatory Economists, 10.

41. These are regulations that scored 2 or fewer points (out of a possible 5) onquestions related to documentation of data and documentation of models andassumptions. Percentages are calculated from data available at http://mercatus.org/reportcard.
http://mercatus.org/reportcardhttp://mercatus.org/reportcardhttp://mercatus.org/reportcardhttp://mercatus.org/reportcard


23/26

JerrY ellig 19


An riA bae npu value ha

pvde a ang pn f calcu-

lan f benef, c , ec. npee-evewed publcan he

cedble eeach

An riA meely aume npu value

bae hem n agency emaewh n fuhe dcumenan

An riA emply hee f caue

and effec ha ae cheen, lg-

cal, and ubanaed by empcal

eeach

An riA mply aume ha ben-

ef, c , a pblem ex,

whu any uppng evdence

An NPrM jufcan f he

egulan cnen wh fnd-

ng n he riA

An NPrM make aemen abu

he pblem, benef, c ha

cnadc fndng n he riA

10. Regulation should acknowledge uncertainty.

Many of the facts in a regulatory analysis are not known

with certainty; there is a greater or lesser chance that they

are true. Similarly, input values used to estimate ben-

efits or costs are not known with certainty, but often fallwithin some plausible range. An accurate RIA accounts

for these uncertainties by calculating ranges of possible

results and informing readers about the likelihood of dif-

ferent results.

Omitting this information misinforms decision mak-

ers about what is really known and not known. If, for

example, the upper-bound cost estimate for a regula-

tion exceeds the lower-bound benefit estimate, decision

makers might make a different decision than they would

if they were just given the two most likely numbers for

benefits and costs. Alternatively, if decision makers know

there is a great deal of uncertainty about the likely out-

comes, they might decide to gather more information

before making the decision.

Circular A-4 contains detailed guidance on how regu-

latory agencies should deal with uncertainty. RIAs


24/26


should acknowledge statistical variability, incomplete

knowledge, and the extent to which the results of the

analysis change when input values change. For rules

involving more than $1 billion in annual economiceffects, the agency must prepare a formal, quantitative

analysis of uncertainty that shows the probability of dif-

ferent outcomes.42

Nevertheless, Regulatory Report Card data indicate that

RIAs often engage in little or no analysis of uncertainty.

For prescriptive regulations proposed in 20082012, 58

percent had little or no analysis of uncertainty about thesystemic problem, 23 percent had little or no analysis of

uncertainty about benefits, and 34 percent had little or no

analysis of uncertainty about costs.43


An riA denfe a yemc pb-lem, peen evdence ha he

pblem ex and gnfcan,

and aee he lkelhd ha

he pblem ex and gnf-

can

An riA and NPrM aume he pblem

he egulan eek lve ex

wh ceany, bu pvde n ev-

dence f exence gnfcance

An riA peen c and ben-

ef fgue a ange f pble

eul

An riA peen c and benef fg-

ue a ngle numbe, mplyng ha

each numbe he cec anwe

An riA pvde evdence abuhe lkelhd f each pble

eul

An riA de n cnde he lkel-

hd f each pble eul

An riA ce empcal eeach

ha jufe he npu value ued

ae he ange and lkelhd

f dffeen eul

An riA make abay aumpn

abu he npu value ued ae

he ange and lkelhd f dffeen

eul

42. OMB, Circular A-4, pp. 3842.

43. These are regulations that scored 0 points or 1 point (out of a possible 5) on thethree Regulatory Report Card questions about uncertainty analysis. Percentagesare calculated from data available at http://mercatus.org/reportcard.
http://mercatus.org/reportcardhttp://mercatus.org/reportcard


25/26

JerrY ellig 21

furTher reading

Abdukadirov, Sherzod and Deema Yazigi. Inflated Benefits in Agencies

Economic Analysis. Mercatus on Policy, Mercatus Center at George

Mason University, Arlington, VA, August 2012. http://mercatus.org

/sites/default/files/InflatedBenefits_MOP112.pdf.

Conover, Christopher J. and Jerry Ellig. The Poor Quality of Affordable

Care Act Regulations. Mercatus on Policy, Mercatus Center at George

Mason University, Arlington, VA, January 2012. http://mercatus.org

/sites/default/files/Poor_quality_of_ACA_ConoverEllig_MOP101.pdf.

Conover, Christopher J. and Jerry Ellig. Rushed Regulation Reform.

Mercatus on Policy, Mercatus Center at George Mason University,

Arlington, VA, January 2012. http://mercatus.org/sites/default/files/publication/Rush_Reg_Reform_ConoverEllig_MOP102_0.pdf.

Dudley, Susan E. and Jerry Brito.Regulation: A Primer. 2nd ed. Arlington,

VA: Mercatus Center at George Mason University and George

Washington University Regulatory Studies Center, 2012.

Ellig, Jerry and Sherzod Abdukadirov. Regulatory Analysis and

Regulatory Reform. Mercatus on Policy, Mercatus Center at George

Mason University, Arlington, VA, November 2011. http://mercatus.org/sites/default/files/ellig_abdukadirov_Regulatory_Analysis.pdf.

Ellig, Jerry and James Broughel. Baselines: A Fundamental Element of

Regulatory Impact Analysis. Mercatus on Policy, Mercatus Center at

George Mason University, Arlington, VA, June 2012. http://mercatus

.org/sites/default/files/Baselines-MOP-final-v1-1-standard.pdf.

Ellig, Jerry and James Broughel. Regulation: Whats the Problem?

Mercatus on Policy, Mercatus Center at George Mason University,

Arlington, VA, November 2011. http://mercatus.org/sites/default

/files/Ellig_broughel_Regulationwhatstheproblem.pdf.

Ellig, Jerry and James Broughel. Regulatory Alternatives: Best and

Worst Practices. Mercatus on Policy, Mercatus Center at George

Mason University, Arlington, VA, February 2012, http://mercatus.org

/sites/default/files/RegulatoryAlternativesElligBroughel2-21-12.pdf.

Ready, Fire, Aim!: A Foundational Problem with Regulations. Mercatus

Research, Mercatus Center at George Mason University, Arlington,VA.Accessed June 26, 2013. http://mercatus.org/sites/default/files/READY

-FIRE-AIM-Foundational-Problem-Regulations.pdf.
http://mercatus.org/sites/default/files/InflatedBenefits_MOP112.pdfhttp://mercatus.org/sites/default/files/InflatedBenefits_MOP112.pdfhttp://mercatus.org/sites/default/files/Poor_quality_of_ACA_ConoverEllig_MOP101.pdfhttp://mercatus.org/sites/default/files/Poor_quality_of_ACA_ConoverEllig_MOP101.pdfhttp://mercatus.org/sites/default/files/publication/Rush_Reg_Reform_ConoverEllig_MOP102_0.pdfhttp://mercatus.org/sites/default/files/publication/Rush_Reg_Reform_ConoverEllig_MOP102_0.pdfhttp://mercatus.org/sites/default/files/ellig_abdukadirov_Regulatory_Analysis.pdfhttp://mercatus.org/sites/default/files/ellig_abdukadirov_Regulatory_Analysis.pdfhttp://mercatus.org/sites/default/files/Baselines-MOP-final-v1-1-standard.pdfhttp://mercatus.org/sites/default/files/Baselines-MOP-final-v1-1-standard.pdfhttp://mercatus.org/sites/default/files/Ellig_broughel_Regulationwhatstheproblem.pdfhttp://mercatus.org/sites/default/files/Ellig_broughel_Regulationwhatstheproblem.pdfhttp://mercatus.org/sites/default/files/RegulatoryAlternativesElligBroughel2-21-12.pdfhttp://mercatus.org/sites/default/files/RegulatoryAlternativesElligBroughel2-21-12.pdfhttp://mercatus.org/sites/default/files/READY-FIRE-AIM-Foundational-Problem-Regulations.pdfhttp://mercatus.org/sites/default/files/READY-FIRE-AIM-Foundational-Problem-Regulations.pdfhttp://mercatus.org/sites/default/files/READY-FIRE-AIM-Foundational-Problem-Regulations.pdfhttp://mercatus.org/sites/default/files/READY-FIRE-AIM-Foundational-Problem-Regulations.pdfhttp://mercatus.org/sites/default/files/RegulatoryAlternativesElligBroughel2-21-12.pdfhttp://mercatus.org/sites/default/files/RegulatoryAlternativesElligBroughel2-21-12.pdfhttp://mercatus.org/sites/default/files/Baselines-MOP-final-v1-1-standard.pdfhttp://mercatus.org/sites/default/files/Baselines-MOP-final-v1-1-standard.pdfhttp://mercatus.org/sites/default/files/Ellig_broughel_Regulationwhatstheproblem.pdfhttp://mercatus.org/sites/default/files/Ellig_broughel_Regulationwhatstheproblem.pdfhttp://mercatus.org/sites/default/files/ellig_abdukadirov_Regulatory_Analysis.pdfhttp://mercatus.org/sites/default/files/ellig_abdukadirov_Regulatory_Analysis.pdfhttp://mercatus.org/sites/default/files/publication/Rush_Reg_Reform_ConoverEllig_MOP102_0.pdfhttp://mercatus.org/sites/default/files/publication/Rush_Reg_Reform_ConoverEllig_MOP102_0.pdfhttp://mercatus.org/sites/default/files/Poor_quality_of_ACA_ConoverEllig_MOP101.pdfhttp://mercatus.org/sites/default/files/Poor_quality_of_ACA_ConoverEllig_MOP101.pdfhttp://mercatus.org/sites/default/files/InflatedBenefits_MOP112.pdfhttp://mercatus.org/sites/default/files/InflatedBenefits_MOP112.pdf


26/26


Williams, Richard and Mark Adams. Regulatory Overload. Mercatus on

Policy, Mercatus Center at George Mason University, Arlington, VA,

February 2012. http://mercatus.org/sites/default/files/Regulatory

_Overload_WilliamsAdams_MOP103.pdf.

Williams, Richard and Jerry Ellig. Regulatory Oversight: The Basics of

Regulatory Impact Analysis. Posted September 12, 2011. http://

mercatus.org/sites/default/files/Mercatus-Regulatory-Impact

-Analysis-Toolkit.pdf.
http://mercatus.org/sites/default/files/Regulatory_Overload_WilliamsAdams_MOP103.pdfhttp://mercatus.org/sites/default/files/Regulatory_Overload_WilliamsAdams_MOP103.pdfhttp://mercatus.org/sites/default/files/Mercatus-Regulatory-Impact-Analysis-Toolkit.pdfhttp://mercatus.org/sites/default/files/Mercatus-Regulatory-Impact-Analysis-Toolkit.pdfhttp://mercatus.org/sites/default/files/Mercatus-Regulatory-Impact-Analysis-Toolkit.pdfhttp://mercatus.org/sites/default/files/Mercatus-Regulatory-Impact-Analysis-Toolkit.pdfhttp://mercatus.org/sites/default/files/Mercatus-Regulatory-Impact-Analysis-Toolkit.pdfhttp://mercatus.org/sites/default/files/Mercatus-Regulatory-Impact-Analysis-Toolkit.pdfhttp://mercatus.org/sites/default/files/Regulatory_Overload_WilliamsAdams_MOP103.pdfhttp://mercatus.org/sites/default/files/Regulatory_Overload_WilliamsAdams_MOP103.pdf

Documents

Ten Principles for Better Regulation