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A problem with cost-benefit analysis?

I'm a fan of cost-benefit analysis.  The approach provides a systematic way to think through the consequences of public policies and provides a reasonable approach to debate merits and demerits of a policy.  

Cost-benefit analysis shouldn't be the final word on a policy because there are some "rules" we may care about regardless of immediate short-run consequences.  For example, even if a cost-benefit analysis found that the benefits to TV thieves outweighed the costs to prior TV owners, few would support a policy of decriminalizing TV theft, in part because a society that had such little respect for property rights is not likely one that would be prosperous in the long-run (or enjoyable to live in for that matter).   All this is a way of saying that our moral intuitions often conflict (sometimes rightfully so) with a short-term utilitarian premise implied by cost benefit analysis (the trolley problem is a common example).

In the realm of food and public health policy, sometimes the way benefits and costs are calculated are myopic, fail to account for dynamic market responses to policies, and rest on shaky methodological assumptions.  Moreover, when we find that benefits exceed costs, one should also ask: what is preventing the market from capitalizing on this arbitrage opportunity?  Stated differently, there would need to be solid evidence of market failure (or some  government failure) in addition to a positive cost-benefit test to justify a public policy.          

Despite these qualms, I see cost-benefit analysis as a useful tool, and it provides one input into the decision making process.

Lately, I've been thinking about what happens to a cost-benefit analysis when one considers multiple policies - in an environment where are increasing calls for new regulations? 

Suppose one did a cost-benefit analysis (CBA) on mandatory country of labeling for meat.  Then, a CBA on a ban on use of subtherapeurtic antibiotics in meat production.  Then, a CBA on a ban on growth hormones.  Then, a CBA on banning gestation crates in pork production.  Then, a CBA on banning transfats.  Then, a CBA on new water regulations for confined animal feeding operations.  Then, a CBA on a carbon tax on methane production from cows.  (I could go on - these represent but a few of the policies that are commonly batted around that have some impact on meat and livestock markets.)  

Is it possible that each of these policies - in isolation - could pass a cost benefit test, and yet when considered jointly fail the test?  Stated differently, is it possible to strictly follow a cost-benefit rule when adopting public policies (only passing policies that pass a CBA) and wind up with a world that we find as less desirable than the one we started with?

I think the answer may be "yes."  For example, each CBA in isolation will assume that the status quo prevails with regard to every other policy.  But, the general equilibrium effects could differ from these individual partial-equilibrium analyses, particularly if there are nonlinearities.

Tyler Cowen recently linked to a new paper by Ian Martin and Robert Pindyck on policies related to catastrophic events that also seems relevant to this discussion.

“How should we evaluate public policies or projects to avert or reduce the likelihood of a catastrophic event? Examples might include a greenhouse gas abatement policy to avert a climate change catastrophe, investments in vaccine technologies that would help respond to a “mega-virus,” or the construction of levees to avert major flooding. A policy to avert a particular catastrophe considered in isolation might be evaluated in a cost-benefit framework. But because society faces multiple potential catastrophes, simple cost-benefit analysis breaks down: Even if the benefit of averting each one exceeds the cost, we should not avert all of them.”

Cowen summarized the paper as follows: 

“The main point is simply that the shadow price of all these small anti-catastrophe investments goes up, the more of them we do, and thus we cannot do them all, even if every single investment appears to make sense on its own terms.”

Typical CBAs often ignore the the hundreds (if not thousands) of laws that already affect farmers' and food purveyors' ability to operate.  It does make one wonder whether diminishing returns shouldn't feature more prominently in CBA.

A short lesson on experimental auctions

One of the most robust findings from the research on what consumers are willing to pay for non-market goods (for example, foods made with new technologies that are not yet on the market) is that people tell researchers they are willing to pay more than they actually will when money is actually on the line.  One review showed, for example, that people tend to overstate how much they are willing to pay in hypothetical settings by a factor of about three.  That means if someone tells you on a survey that they're willing to pay $15, then they'd probably only actually pay about $5.

One way to deal with this problem of hypothetical bias is to construct experimental markets where real money and real products are exchanged.  The key is to use market institutions that give consumers an incentive to truthfully reveal their values' for the good up for sale.  I wrote a whole book with Jason Shogren on the subject of using experimental auctions for this purpose a few years back.

I recently filmed a short primer on the consumer research method for an on-line course being created by my colleague Bailey Norwood.  He graciously put it up online for anyone's viewing pleasure.  

If people want it, the government must subsidize it

A recent report from the Australian government argues that consumers are taking more responsibility for their health (HT Ellen Goddard).  The evidence used to bolster this claim is the fact that Australians are spending more money on over-the-counter medicines that are not subsidized by the government.  

That use of these unsubsidized "complementary" medicines is on the rise is apparently all the reason that is needed to now subsidize them.  

“The growing contribution of complementary medicines needs to be seen by the government as the impetus for fostering the appropriate proactive policies and for recognising complementary medicines as vital part of a comprehensive Australian health care system.””

This seems to be another example where any government intervention in the name of "public health" is justifiable by definition because it is intended to improve public health. So, the logic seems to be: if people are voluntarily willing to spend more money on an item through the market, then this is evidence that the government needs "appropriate proactive policies" to help people buy the item.  

It is a strange day when one sees the market working well at providing people what they want as evidence that more government intervention is necessary.

Even the Amish grow GMOs

Last week, I was in the grocery store looking for popcorn.  I ran across a brand I'd never seen before that advertised "Amish popcorn."  I gave it a try and it tasted just as good as the heathen brands.

While munching on the tasty treat, a question came to mind: do the Amish use GMO crops?  As far as I know, there are no genetically engineered popcorn seeds on the market, but all those reality shows I see advertised on A&E, Discovery, and the like show hardy field corn and tobacco plants growing alongside the homes of the Amish.

Sure enough, a quick internet search turned up story after story after story revealing that many Amish farmers indeed plant genetically engineered corn or tobacco.  

It seems the Amish have turned the tables on conventional wisdom.  Most consumers are very pro-technology and innovation when it comes to things like cell phones, TVs, and cars, but are often technology-averse when it comes to agriculture. It seems that at least some of the Amish hold exactly the opposite position.  

There is a deep irony in the fact that the Amish farm is something many people idealize - small, family-run operations - that uses a technology that frightens many consumers.  In part it reveals the disconnect between romanticized images of farm life and the reality of the choices made by the flesh-and-blood people who work there.

While it might do well if more people understood more about production agriculture, it seems I could have known a bit more about the Amish before writing this paragraph at the end of a chapter on biotechnology in the Food Police:

“Perhaps we Americans can afford to give up a few comforts and pay more for more “naturally” grown food. But, this return to nature is pure fantasy. Human interactions with nature have altered animals and vegetation in a way that our ancient ancestors could scarcely imagine. The food elite’s vision of the world would return production agriculture to its state a hundred years ago; to a time when food was far less plentiful and in which those who did the back-breaking work of farming lived a meager existence. We might like to visit the Amish but few are clamoring to convert.”

It seems that the at least some of the Amish are more technologically progressive than I gave them credit for.  In fact, in this one dimension, they are more technologically progressive than many Americans.