Congress is
debating whether to make federal agencies estimate “indirect” costs of the
regulations they propose. Skeptics suggest the term is too
vague.
In reality, a
requirement to estimate indirect costs need not create a Pandora’s grab bag of
miscellaneous and poorly specified cost calculations. A little bit of economics
goes a long way toward defining indirect costs of a regulation in a coherent
way.
Indirect costs
are the costs to society that occur when people change their behavior in
response to incentives created by the regulation. Major indirect costs include
value lost when people cut back purchases in response to regulation-induced
price increases, reductions in quality or convenience caused by regulation, and
risk/risk tradeoffs.
That’s a
mouthful of complicated language. But airport security regulations provide a
familiar example of all three indirect costs. The accompanying graphic, based
on a Mercatus study published several years ago, identifies several major costs
of airport security screening. The obvious, direct cost is the money spent
to pay for Transportation Security Administration (TSA) screeners. But that’s
not the only or even the largest cost.
The screening
increases ticket prices because it is funded with an explicit fee imposed on
airline passengers. As a result, fewer people fly. The people who decline to
fly sacrifice some value because they forego a trip entirely or have to take a
less convenient mode of travel. The lost value is big—about $2.35 billion in
2005.
The people who
continue to fly also feel some costs in addition to the ticket fee. They spend
more time waiting around to get groped in airports. The increased waiting time
alone was worth $2.75 billion in 2005, based on the Department of
Transportation’s own estimates of the value of an hour of waiting time.
Finally,
airport security regulation also increases some people’s risk of dying in travel
accidents. Peer-reviewed economic research found that new post-9/11 airport
security regulations increased highway deaths by 116 people in the fourth
quarter of 2002. Many people taking short trips substituted automobile for
air travel, and auto travel is riskier than air travel.
Focusing on
social costs also reveals what factors should not count as
indirect costs. Job losses, for instance, are not a cost of regulation. They
are just an example of how regulation redistributes opportunities from some
members of society to others. Airport security regulation destroyed the jobs of
contractors who used to operate checkpoints pre-9/11, but it created jobs for
TSA agents and people who manufacture 3-ounce travel-sized bottles of shampoo.
The only job-related costs of regulation are the transition costs of moving
people from one set of jobs to another.
Like an
iceberg largely submerged below the surface, indirect costs are hidden—but
dangerous to ignore.
Article By Jerry Ellig, "What Are the
Indirect Costs of Regulation?", Mercatus Centre, George Mason University, Dec. 10, 2011
3 comments:
Similar kind of indirect cost is incurred due to regulation when we take the example of plastic bags and paper bags.The government when banned the plastic bags majority of the shops switched to paper bags .I would like to analyse the indirect costs incurred in the same way as is done in the above article.
1. Paper bags are costlier than plastic bags. So , when the shops switch from plastic bags to paper bags the extra cost incurred is charged from the customers itself and hence ,becomes a indirect cost for the customers.
2. Now, because of extra cost if the customer starts to switch over to some substitute ,like always carrying a bag while shopping ,this causes inconvenience to the customers , again some value is lost and there indirect cost is incurred.
3. People who still continue to buy, face the problem that they cannot reuse the paper bag or if they can use them, not more than twice or thrice .
4. Then, when we talk about the Eco-friendliness of both ,then we can say that plastic bags are more Eco- friendly than the paper bags because as we know a lot of trees have to be cut in order to make paper bags, also paper bags do not have a indefinite recycled life but that is not the condition with the plastic bags, plastic bags have a indefinite recycled life .also now-a-days plastic bags are also biodegradable.
5. When plastic bags industries shut down ,the skilled workers will switch their jobs to the paper bag industry and there also some cost will be incurred in this transition . There is also a condition where the skills required might be different then the workers of this category will loose their jobs in this transition. and again the situation of indirect cost will arise.
I hope I was able to deliver meaningful analysis.
By 15bal021
Dear Sonakshi,
Wonderful examples!
Great!
respected sir after reading your article i think this can be take as example of indirect cost. The materials and supplies needed for the company's day-to-day operations are examples ofindirect costs. These include items such as cleaning supplies, utilities, office equipment rental, desktop computers and cell phones. While these items contribute to the company as a whole, they are not assigned to the creation of any one service.
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