The effects of litigation on economic regulations

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Macey, William Joseph

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This thesis focuses on the effect of litigation on economic regulations. An interesting aspect of U.S. regulatory policy is that agencies such as the Environmental Protection Agency are often forbidden from taking costs into account when issuing a regulation. This thesis presents a theoretical model that shows that such a policy is optimal under certain conditions. The use of discretionary tools such as a cost-benefit analysis opens the agency to greater amounts of litigation. As litigation costs become substantial, it is more likely to be optimal for the legislature to promulgate regulations without knowing their cost, even if it risks imposing regulations whose benefits are outweighed by its costs. Another remarkable aspect of environmental policy is that the EPA often chooses not to issue regulations even when it has the discretion to do so. An example of this manifests itself in the implementation of the Clean Air Act. When the law was first passed, Congress granted the EPA discretion to identify and regulate hazardous air pollutants. However, after years of inaction by the EPA, Congress amended the act and specifically identified the toxins for which the agency was to set standards. Again, this phenomenon may be a result of litigation costs. This thesis shows that an agency with discretion will not enforce every regulation over which it has discretion. Instead, it will focus on enforcing the regulations with the greatest net benefits. The number of regulations the agency chooses to enforce heavily depends on the probability it wins any legal challenges. A final example concerns the Fish and Wildlife Service, the agency in charge of identifying endangered species. Because it is expensive for the FWS to identify and locate endangered species, interested parties often sue the FWS to force it to protect a particular species. This thesis presents a theoretical model that shows that such litigation can convey important information to the agency and help it decide which regulations it should issue. Expected net benefits are greater when the agency uses litigation costs to filter regulations than when it enforces every possible regulation.




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