Economics, competition and the regulation of public health risks

The efficiency of regulation of public health risks has been questioned on the grounds that the costs of regulation may outweigh the benefits. There are strong arguments that risk management is best left to the market place, where individual consumers can make the trade-off between risk and the forgone benefits of reduced consumption of hazardous products. The paper reviews the economic arguments for the regulation of health risks and the use of safety standards.

There are five key arguments for regulation of public health risks. Consumers misperceive the hazards of products and therefore take more risks than they would if fully informed. The provision of information has certain public goods characteristics (it is non-rival). There may be economies of scale in collecting, providing and disseminating information that is costly to acquire. The private decision maker may not be the person bearing the whole risk, exposing others to risk e.g. children. If public policy has chosen to provide public finance for health care it may be efficient to discourage risk taking by individuals even if that risk taking is optimal from the individual's perspective.

There are arguments for public intervention to reduce private health risks and regulation of risk is a legitimate tool to achieve the socially optimal level of risk in certain circumstances. Private subjective assessment of risk may not capture the full social benefits of risk reduction. Regulation by safety standards however may fail to capture the full range of concerns about risk, including avoiding catastrophe, taking personal control of risk, and a distrust of expert opinion.