Mad Cows, Terrorism and Junk Food: Should Public Policy Reflect Subjective or Objective Risks?

Olof Johansson-Stenman ()

No 194, Working Papers in Economics from University of Gothenburg, Department of Economics

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 subjective risks. The latter are important because of the mental suffering associated with the risk and as a basis for corrective taxation and second-best adjustments. Optimality rules for public provision of riskreducing investments, “internality-correcting” taxation and provision of (costly) information to reduce people’s risk-perception bias are presented.

Keywords: Subjective risk; risk management; risk regulation; risk perception bias; terrorism; fat taxes; internalities; cost-benefit analysis; corrective taxation; paternalism (search for similar items in EconPapers)
JEL-codes: D81 H40 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2006-01-25
New Economics Papers: this item is included in nep-pbe and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:gunwpe:0194

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