TOOL #58. TYPOLOGY OF COSTS AND BENEFITS

Transcription

1 TOOL #58. TYPOLOGY OF COSTS AND BENEFITS 1. INTRODUCTION A sound analysis of initiatives requires careful assessment of the costs and benefits. Societal costs and benefits are the most relevant to consider when assessing the impact of a policy from the point of view of society as a whole. However, the net impact on total welfare and the net impacts on specific groups (i.e. winners and losers) as well as overall affordability is important to inform policymaking. It is important to bear in mind that costs and benefits are simply terms used to describe impacts which affect social (and private) welfare in different directions. A cost is any item that makes someone worse-off, or reduces a person s well-being. A benefit is any item that makes someone better-off, or increases a person's well-being. Depending upon the nature of the impact generating the change in well-being, costs and benefits can be direct or indirect. The different types of costs and benefits are illustrated in Box 2 and described below 704. Costs often arise immediately following a new regulation, are concentrated on a specific group of stakeholders and are in general more easily measurable in monetary terms. Benefits, on the other hand, tend to emerge over a longer time frame. Costs and benefits should usually be based on market prices (reflecting the opportunity cost of action). However, these are not always available and so other methods may be needed to express impacts in monetary terms or indeed sometimes impacts cannot be expressed in monetary terms (e.g. what is the value of an increased protection of fundamental rights? or the loss of biodiversity?). Unsurprisingly, costs and benefits are often mirror images. The cost savings brought about by many regulatory interventions aim at simplifying legislation, reducing regulatory burden, or harmonizing requirements for companies operating across the single market, are an important category of benefits. At times, what is a cost to a party may be a benefit to another and these symmetrical changes in private welfare will normally cancel out at the aggregate level. In addition, Investments which are needed to comply with legislation generate at the same time economic activity and income and may enable cost savings later. It is therefore very important to distinguish between costs and benefits that represent net additions or reductions of total welfare, as opposed to costs and benefits that arise for specific categories of stakeholders as a result of a transfer of resources. 2. DIFFERENT TYPES OF COSTS The total cost arising from a given initiative or regulation is the sum of (1) Direct Costs; (2) Enforcement Costs; and (3) Indirect costs: 704 Assessing the Costs and Benefits of Regulation; CEPS (2013) a study prepared for the European Commission; Chapter 1.

2 Direct costs from regulation include direct compliance costs and hassle/irritation burdens: Regulatory charges, which include fees, levies, taxes, etc. Substantive compliance costs, which encompass those investments and expenses that are faced by businesses and citizens in order to comply with substantive obligations or requirements contained in a legal rule; and Administrative burdens are those costs borne by businesses, citizens, civil society organizations and public authorities as a result of administrative activities performed to comply with information obligations included in legal rules. Hassle costs are often associated with businesses, but they apply equally well to consumers: they include costs associated with waiting time and delays, redundant legal provisions, corruption etc. Box 1. Policy types and associated recurrent costs Type of regulatory alternative Self-regulation Co-regulation Market-based instruments Performance-based standards Command and control Recurrent costs Transaction costs Direct compliance cost Enforcement costs Transaction costs Direct compliance cost Transaction costs Charges Direct compliance costs Indirect compliance costs Direct compliance costs Indirect compliance costs Charges Administrative burdens Direct compliance costs Indirect compliance costs Enforcement costs Adjudication 461

3 Box 2. A map of regulatory costs and benefits (CEPS report page 21) 462

4 Enforcement costs. These costs are associated with activities linked to the implementation of an initiative such as monitoring, enforcement and adjudication. Indirect regulatory costs. These costs are incurred in related markets or experienced by consumers, government agencies or other stakeholders that are not directly targeted by the initiative/regulation. These costs are usually transmitted through changes in the prices and/or availability and /or quality of the goods or services produced in the regulated sector. Changes in these prices then ripple through the rest of the economy changing prices in other sectors and ultimately affecting the welfare of consumers. The category also includes so-called indirect compliance costs (i.e. cost related to the fact that other stakeholders have to comply with legislation) and costs related to substitution (e.g. reliance on alternative sources of supply), transaction costs and negative impacts on market functioning such as reduced competition or market access, or reduced innovation or investment. 3. THE IMPACT OF REGULATORY COSTS ON DIFFERENT STAKEHOLDERS It is possible to categorise costs in terms of the stakeholder affected i.e. business, citizens and consumers and public administrations. Direct costs Indirect costs Enforcement costs Impact of regulatory costs on different stakeholders Type of cost Citizens Consumers Business Administrations Charges Administrative burdens Substantive compliance costs Hassle costs Indirect compliance costs Offsetting Reduced competition Reduced market access Reduced investment/innovation Information & monitoring Inspections and sanctions Complaint handling Adjudication/litigation Citizens: means citizens and society as a whole and refers to impacts that are widespread and do not affect a particular sub-group in a specific way; Consumers refers to a specific product or service. Consumers do not necessarily overlap with citizens but may be a sub-group e.g. a group of citizens targeted by a given regulation; Business includes all types of businesses including SMEs; Public administrations are EU, national, regional or local administrations. 463

5 4. DIFFERENT TYPES OF BENEFITS There is no commonly agreed taxonomy of regulatory benefits although the comprehensive study undertaken for the Commission recommends a convenient classification into three categories which are shown in the figure in Box 2.: (1) Direct regulatory benefits (Area 4 in the figure in Box 2). The improvement of the well-being of individuals, which in turn encompasses health, environmental and safety improvements; and Efficiency improvements, which include, notably, cost savings but also information availability and enhanced product and service variety and quality for end consumers. (2) Indirect regulatory benefits (Area 5 in the figure in Box 2): Spill-over effects related to third-party compliance with legal rules (so-called indirect compliance benefits ); Wider macroeconomic benefits, including GDP improvements, productivity enhancements, greater employment rates, improved job quality etc.; and Other non-monetisable benefits, such as protection of fundamental rights, social cohesion, reduced gender discrimination, international and national stability, etc. Box 3 Important issues in respect of costs and benefits When assessing costs or benefits it is important to: Distinguish between private or social costs / benefits. Avoid double-counting costs and benefits of regulation by recognising that the gains of one category and the losses of another may be flip sides of the same coin 705. Recall that all costs (and benefits) generated by a new legal provision are by definition incremental costs, i.e. they are additional with respect to the existing situation, as well as additional to the costs (and benefits) that would emerge absent legislative intervention. This means that all costs (and benefits) considered for the purposes of an impact assessment should exclude those costs (and benefits) that would materialize anyway even in absence of a new policy measure ("BAU"). Regardless of the relevance of incremental changes in social costs and benefits, it is the private costs and benefits, and the overall cumulative costs and benefits, that are the most familiar and relevant concepts for non-experts and different stakeholder groups. 705 For example, assume that a new technical standard will impose an additional 1 billion of direct costs to car manufacturers, and that half of these are passed-on to consumers. Counting both the 1 billion of additional direct costs for manufacturers and the half billion that will fall on consumers would lead to an incorrect overestimation of the costs of the regulation. However, the opportunity cost borne by those consumers that, as a result of the price increase, will decide not to buy a car should be counted separately, as a net loss for society. 464

6 (3) The ultimate impacts of regulation (Area 6 of the figure in Box 2), All regulations usually aim, as an ultimate impact, to achieve some advancement in social welfare, which can be described in terms of efficiency or in others terms. These ultimate impacts encompass well-being, happiness and life satisfaction, environmental quality, and more economic goals such as GDP growth and employment. They may overlap with certain direct benefits which a specific initiative aims to achieve. 465