Cost-Benefit Analysis is a pseudo-scientific approach to policy making that tried to compare the costs and benefits of any particular policy option, ideally in a quantitative way, such as by weighing costs and benefits in dollar terms. The main limitations of cost-benefit analysis are:
- Determination of the items to include as costs and as benefits dependend to a great extent on the creativity of the analyst.
- The problem of Quantifying Risk is difficult when the amounts involved are human lives, similar intangibles or are matters about which data is poor, rather than well understood, purely economic variables.
- Analysts systemically overestimate the cost of complying with regulation because they fail to account sufficiently for the ability of businesses to adapt to new regulations in an economic fashion, and systematically underestimate benefits in the interest of being conservative in the assumptions made by the analyst. As a result, cost-benefit analysis results in systemtic underregulation of harmful activity.