Integrating Risk Integrating Risk Assessment and Benefit-Assessment and Benefit-Cost AnalysisCost Analysis

Richard A. Williams, Ph.D.Richard A. Williams, Ph.D.Managing Director for Regulatory Managing Director for Regulatory Studies and the Government Studies and the Government Accountability ProjectAccountability ProjectMercatus Center at George Mason Mercatus Center at George Mason UniversityUniversity

Human Behavior and Human Behavior and Reducing Population Reducing Population RiskRisk

.Nutrition, Toxicology, Microbiology, Chemistry, Pathology...

What is a healthier or safer practice?

Psychology, Sociology, Economics, Ag. Economics

How do we get organizations or consumers to make the right changes?

Reduce Risk

Risk Analysis - TodayRisk Analysis - Today

RiskAssessment

RiskCommunication

RiskManagement Cost-

benefit analysis

Separation of Risk Separation of Risk Assessment and Risk Assessment and Risk Management?Management?

Safety analysisSafety analysis Conservative assumptionsConservative assumptions

Winston Churchill got Winston Churchill got it...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

Risk Management and Risk Management and Benefit-Cost AnalysisBenefit-Cost Analysis

B/C analysis is analysis of B/C analysis is analysis of possible decisions (options)possible decisions (options)

Also should be unbiased Also should be unbiased informationinformation

More in common with risk More in common with risk assessment that decision makingassessment that decision making

Analysis – Cost-Benefit Analysis – Cost-Benefit and Risk Assessmentand Risk Assessment Net Benefits not always chosen Net Benefits not always chosen

(unlike safety levels)(unlike safety levels) Neither science, both inform Neither science, both inform

decision-makingdecision-making Both are analysisBoth are analysis

Reasons for Reasons for OneOne AnalysisAnalysis Benefits = $ Risk ReductionBenefits = $ Risk Reduction Probabilistic risk reductions Probabilistic risk reductions

common to bothcommon to both Countervailing risks combine Countervailing risks combine

microeconomics and risk microeconomics and risk assessmentassessment

Easier for managersEasier for managers

Combined Risk Combined Risk AnalysisAnalysis

Public Public Health Health ProblemProblem

Risk Analysis FormatRisk Analysis Format

I.I. Define public health problemDefine public health problem ◊ ◊ Risk, not solutionsRisk, not solutions

◊ ◊ Not too narrowNot too narrow

◊ ◊ Not too broadNot too broad

A Risk AnalysisA Risk Analysis

Public Public Health Health ProblemProblem

Hazard & Hazard & Market Market Failure IDFailure ID

Hazard and Market Hazard and Market Failure IdentificationFailure IdentificationII.II. Hazard and market failure Hazard and market failure

◊ ◊ Hazard Hazard IdentificationIdentification ◊ ◊ Risk importanceRisk importance ◊ ◊ Market failureMarket failure

A Risk AnalysisA Risk Analysis

Public Public Health Health ProblemProblem

Hazard & Hazard & Market Market Failure IDFailure ID

Control Control OptionsOptions

Control OptionsControl OptionsIII.III. Control OptionsControl Options

Legal Requirements for target riskLegal Requirements for target riskWarning and information labelsWarning and information labelsInformation provisionInformation provisionProduction standardsProduction standardsProduct StandardsProduct StandardsPermitsPermitsTestingTesting

A Risk AnalysisA Risk Analysis

Public Public Health Health ProblemProblem

Hazard & Hazard & Market Market Failure IDFailure ID

Control Control OptionsOptions

BaselinesBaselines

BaselinesBaselines

IV.IV. BaselinesBaselines

Producer PracticesProducer PracticesConsumer PracticesConsumer PracticesExposure/RiskExposure/Risk

A Risk AnalysisA Risk Analysis

Public Public Health Health ProblemProblem

Hazard & Hazard & Market Market Failure IDFailure ID

Control Control OptionsOptions

BaselinesBaselines

Market Market ResponsesResponses

Market ResponsesMarket Responses Changes in consumer behaviorChanges in consumer behavior

– Knowledge, practicesKnowledge, practices Changes in producer behaviorChanges in producer behavior

– Equipment, practices, knowledge, Equipment, practices, knowledge, products, packaging, businessproducts, packaging, business

Direct effects/Ripple effectsDirect effects/Ripple effects

A Risk AnalysisA Risk Analysis

Public Public Health Health ProblemProblem

Hazard & Hazard & Market Market Failure IDFailure ID

Control Control OptionsOptions

BaselinesBaselines

Market Market ResponsesResponses

Countervailing risk decreases (benefits)

Countervailing risk increases (costs)

Non-risk costs

Non-risk benefits

Requirements to Requirements to BenefitsBenefits

Control Option

Behavior Change

Costs

BenefitsProvisionsCoverageTimeHazards

Countervailing Risks – Countervailing Risks – Costs and BenefitsCosts and Benefits Consumption RisksConsumption Risks Production RisksProduction Risks Public/private risksPublic/private risks

Countervailing Countervailing Production RisksProduction Risks

Supplier Firm

Downstream Firm

Substitute Firm

Compliment Firm

Target Firm

Implications:Implications:Risk Analysis and CV Risk Analysis and CV RisksRisks Risk Assessment - No Risk Assessment - No

conservative assumptionsconservative assumptions Risk Communication – more Risk Communication – more

controversialcontroversial Risk Management Risk Management

– No precautionary principleNo precautionary principle– Uncertainty trumps small risksUncertainty trumps small risks

A Risk AnalysisA Risk Analysis

Public Public Health Health ProblemProblem

Hazard & Hazard & Market Market Failure IDFailure ID

Control Control OptionsOptions

BaselinesBaselines

Market Market ResponsesResponses

Countervailing risk decreases (benefits)

Countervailing risk increases (costs)

Non-risk costs

Non-risk benefits

Sensitivity Sensitivity AnalysisAnalysis

SummarySummary Risk Assessment and Cost-Benefit Risk Assessment and Cost-Benefit

Analysis are not/should not be Analysis are not/should not be risk management.risk management.

Good reasons for combining them Good reasons for combining them including benefits, economies of including benefits, economies of scale and countervailing risks.scale and countervailing risks.

New framework combines both.New framework combines both.