Rational Risk Policy

Abstract

Ideally, individual risk‐taking decisions and government risk policies should be based on a rational balancing of risk and cost. Unfortunately, private decisions are subject to a number of biases including overestimation of small probabilities and alarmist responses to ambiguous risks. Hazard warnings can potentially be effective, but are not always ideal, as the people now overestimate the risks of smoking. Labour market estimates of the value of life can provide a rational reference point for benefit‐cost tests of risk regulations. The pressures exerted by irrational public responses to risk often lead to regulations that impose inordinately high costs per life saved. Excessive regulation potentially makes society worse off from a health and safety standpoint as shown by the risk–risk analysis methodology developed in this book. Similarly, liability rules and social insurance systems also should be structured to reflect an efficient balancing of risk and cost.