Mad cows, terrorism and junk food: Should public policy reflect perceived or objective risks?

Olof Johansson-Stenman ()

Journal of Health Economics, 2008, vol. 27, issue 2, 234-248

Abstract: 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.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhecon:v:27:y:2008:i:2:p:234-248

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