Integrating Risk Assessment and BenefitCost Analysis

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Integrating Risk Assessment and Benefit-Cost
Analysis

• Richard A. Williams, Ph.D.
• Managing Director for Regulatory Studies and the
  Government Accountability Project
• Mercatus Center at George Mason University

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Human Behavior and Reducing Population Risk
.
What is a healthier or safer practice?
Reduce Risk
How do we get organizations or consumers to make
the right changes?
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Risk Analysis - Today
Risk Communication
Risk Assessment
Risk Management
Cost-benefit analysis
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Separation of Risk Assessment and Risk Management?

• Safety analysis
• Conservative assumptions

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Winston Churchill got it...
...he never fell a victim to the black magic of
specialist infallibility. It was the task of
specialists and experts to supply the weights and
measures it was for him to assess them and to
reach conclusions.
From Winston Churchill, An Intimate Portrait by
Violet Bonham Carter
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Risk Management and Benefit-Cost Analysis

• B/C analysis is analysis of possible decisions
  (options)
• Also should be unbiased information
• More in common with risk assessment that decision
  making

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Analysis Cost-Benefit and Risk Assessment

• Net Benefits not always chosen (unlike safety
  levels)
• Neither science, both inform decision-making
• Both are analysis

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Reasons for One Analysis

• Benefits Risk Reduction
• Probabilistic risk reductions common to both
• Countervailing risks combine microeconomics and
  risk assessment
• Easier for managers

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Combined Risk Analysis
Public Health Problem
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Risk Analysis Format

• Define public health problem
• ? Risk, not solutions
• ? Not too narrow
• ? Not too broad

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A Risk Analysis
Public Health Problem
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Hazard and Market Failure Identification

• Hazard and market failure
• ? Hazard Identification
• ? Risk importance
• ? Market failure

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A Risk Analysis
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Control Options

• Control Options
• Legal Requirements for target risk
• Warning and information labels
• Information provision
• Production standards
• Product Standards
• Permits
• Testing

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A Risk Analysis
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Baselines

• Baselines
• Producer Practices
• Consumer Practices
• Exposure/Risk

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A Risk Analysis
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Market Responses

• Changes in consumer behavior
• Knowledge, practices
• Changes in producer behavior
• Equipment, practices, knowledge, products,
  packaging, business
• Direct effects/Ripple effects

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A Risk Analysis
Market Responses
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Requirements to Benefits
Costs
Control Option
Behavior Change
Provisions Coverage Time Hazards
Benefits
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Countervailing Risks Costs and Benefits

• Consumption Risks
• Production Risks
• Public/private risks

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Countervailing Production Risks
Risk Changes
Target Firm
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ImplicationsRisk Analysis and CV Risks

• Risk Assessment - No conservative assumptions
• Risk Communication more controversial
• Risk Management
• No precautionary principle
• Uncertainty trumps small risks

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A Risk Analysis
Market Responses
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Summary

• Risk Assessment and Cost-Benefit Analysis are
  not/should not be risk management.
• Good reasons for combining them including
  benefits, economies of scale and countervailing
  risks.
• New framework combines both.