Define the term benefit-cost analysis as it relates to environmental regulation. How does this analysis method address external costs? Distinguish it from cost-effectiveness analysis
What will be an ideal response?
"A benefit-cost analysis begins by examining the need for the proposed regulation and then describes a range of alternative approaches. Afterward, it compares the estimated costs of the proposed action and the main alternatives to the benefits that will be achieved. All costs and benefits are given monetary values (where possible) and compared by means of what is commonly referred to as a benefit-cost (or cost-benefit) ratio. A favorable ratio for an action means that the benefits outweigh the costs, and the action is said to be cost effective. . . ."
"By including all of the costs and benefits of a project or a regulation, benefit-cost analysis effectively brings the externalities into the economic accounting. One suggestion for accomplishing this is the use of green fees or taxes." This is how benefit-cost analysis can include external costs like pollution, poor health of employees, or other negative aspects of doing business. "Cost-effectiveness analysis is an alternative option for evaluating the costs of regulations. Here the merits of the goal are accepted, and the question is: How can that goal be achieved at the least cost? To find out, alternative strategies for reaching the goal are analyzed for costs, and the least costly method is adopted."
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