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

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  • Johansson-Stenman, Olof

    ()
    (Department of Economics, School of Business, Economics and Law, Göteborg University)

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.

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File URL: http://hdl.handle.net/2077/2727
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Bibliographic Info

Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 194.

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Length: 37 pages
Date of creation: 25 Jan 2006
Date of revision:
Handle: RePEc:hhs:gunwpe:0194

Contact details of provider:
Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Related research

Keywords: Subjective risk; risk management; risk regulation; risk perception bias; terrorism; fat taxes; internalities; cost-benefit analysis; corrective taxation; paternalism;

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