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2007-11-29 | Discussion Paper

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

Johansson-Stenman, Olof. 2008. “Mad Cows, Terrorism and Junk Food: Should Public Policy Reflect Subjective or Objective Risks?” Journal of Health Economics 27:2
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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.