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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.

Suggested Citation

  • Johansson-Stenman, Olof, 2006. "Mad Cows, Terrorism and Junk Food: Should Public Policy Reflect Subjective or Objective Risks?," Working Papers in Economics 194, University of Gothenburg, Department of Economics.
  • Handle: RePEc:hhs:gunwpe:0194
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    File URL: http://hdl.handle.net/2077/2727
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    More about this item

    Keywords

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

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H40 - Public Economics - - Publicly Provided Goods - - - General

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