Friday, May 20, 2011

Regulating Cheese?

Early in 2011, the FDA was considering placing tighter regulations on the production of "raw milk" cheeses. Regulation is a tricky economic issue. For a regulation to add to overall economic welfare, the regulation must add more economic benefits than economic costs. This is done in many cases with Benefit-Cost Analysis.

The basic idea of benefit cost analysis is that you estimate the benefits of a regulation - such as requiring cheese producers to age "raw milk" cheeses for 60 days. Those current estimated benefits and discounted future benefits are then calculated and adjusted by some probability of an adverse event taking place. Likewise the current estimated costs and discounted future costs of the regulation are calculated. If the overall benefits are greater than the overall costs, then the regulation can be viewed as adding to overall economic welfare.

This is a much simplified look at this type of economic evaluation, but hopefully we can see the basic approach to evaluating economic regulation.

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