Risk Regulation, Endogenous Public Concerns, and the Hormones Dispute: Nothing to Fear But Fear Itself?

Abstract:     
The dispute between the United States and the European Union (EU) regarding the EU ban on meat imports treated with hormones raises the question: How should regulators respond to public fears that are disproportionate to the risks as evaluated by experts in risk assessment? If regulators cannot eliminate public fears through education, then there is some social benefit from regulations that reduce the feared risks and thereby reduce public anxiety and distortions in behavior flowing from that anxiety. These considerations imply that we cannot simply ignore public fears that technocrats would deem "irrational." On the other hand, there is the danger that special interests may seek to generate consumer anxiety and lobby for regulations that serve their interests. I explore an approach that takes public fears seriously as social costs but also treats them as endogenous variables. I use this framework to evaluate risk regulations in terms of economic efficiency and suggest that the danger of inefficient regulation is most acute when domestic industries promote or sustain fears regarding imported products. From this perspective, the World Trade Organization ruling against the EU in the hormones dispute, based on the risk assessment requirements in the Agreement on Sanitary and Phytosanitary Measures, may represent a reasonable approach to guarding against the danger of regulatory protectionism, understood broadly to describe inefficient regulations that the importing country would not have adopted but for the foreign nationality of the producers disadvantaged by those regulations.

Working Paper Series