Mad cows, terrorism and junk food: should public policy reflect perceived or objective risks?
Empirical evidence suggests that people's risk-perceptions are often systematically biased. This paper develops a simple framework to analyse public policy when this is the case. Expected utility (well-being) is shown to depend on both objective and perceived risks (beliefs). The latter are important because of the fear associated with the risk and as a basis for corrective taxation and second-best adjustments. Optimality rules for public provision of risk-reducing investments, "internality-correcting" taxation (e.g. fat taxes) and provision of costly information to reduce people's risk-perception bias are presented.
Johansson-Stenman
Olof
O
Department of Economics, School of Business, Economics and Law, Göteborg University, Vasagatan 1, Göteborg, Sweden. Olof.Johansson@economics.gu.se
D000818:Animals; D002417:Cattle; D016643:Encephalopathy, Bovine Spongiform; D005523:Food Supply; D006801:Humans; D015233:Models, Statistical; D008962:Models, Theoretical; D011050:Policy Making; D011639:Public Opinion; D011640:Public Policy; D018570:Risk Assessment; D023481:Terrorism