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

  • Johansson-Stenman, Olof

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.

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File URL: http://www.sciencedirect.com/science/article/B6V8K-4R7NPWM-C/1/44dd268cdc76d4f9632553f79e9c5d32
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Article provided by Elsevier in its journal Journal of Health Economics.

Volume (Year): 27 (2008)
Issue (Month): 2 (March)
Pages: 234-248

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Handle: RePEc:eee:jhecon:v:27:y:2008:i:2:p:234-248
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505560

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