Using Risk Assessment, Benefit‐Cost Analysis, and Real Options to Implement a Precautionary Principle

Risk assessment is an established methodology for environmental and public health issues. However, economists' core approach to both risk assessment and risk management, benefit‐cost analysis, often fails to transparently evaluate variability in a way that is a trademark of quantitative risk assessment. Concurrently, environmental advocates are proposing new management criteria based on a vaguely framed “Precautionary Principle.” This manuscript demonstrates how risk assessment techniques for characterizing variability, benefit‐cost analysis, and decision‐making criteria under uncertainty and irreversibility can be combined. The result is a quantifiable, case‐specific, and risk‐dependent “precautionary” threshold for action compared to standard benefit‐cost approaches. The Clean Air Act and the regulation of genetically modified corn provide applications.