Risk Regulation

Abstract

Risk regulation is of crucial importance for the functioning of contemporary societies, where risk is ubiquitous. Genetically modified organisms (GMOs), nanotechnologies, nuclear power and chemicals are examples of technologies and products that promise great benefits to society, and yet entail risks that need to be addressed by regulators. How should lawyers and policymakers decide what risks a society ought to bear? When is regulation needed to control such risks and when can the risks be left unregulated? What weight should be given to the view of scientists and what role should be left to politics?

This chapter presents the most relevant law and economics theories for the field of risk regulation. It first introduces the economic theories that justify regulatory intervention. It discusses both traditional theories, such as market failures, and more recent theoretical developments drawing on behavioral economics. Next to these theories, the chapter focuses on the cost-benefit analysis (CBA) paradigm, which has been defended by most legal-economic scholars as the center paradigm for risk regulation.

While among law and economics scholars and in regulatory circles, consensus coalesced around the desirability of cost-benefit analysis, skepticisms grew among academics and pro-regulatory interest groups. This chapter argues that we are in the midst of a debate where the desirability of cost-benefit analysis is questioned anew. Cost-benefit analysis has the virtue of allowing comparisons between different consequences of regulatory intervention. This same virtue is perceived by many as a vice. In fact, assigning a dollar value to various effects of risk regulation is a risky enterprise, most prominently because the numbers generated by the economic methodologies are allegedly inaccurate. The chapter presents the main CBA methodologies used and shows to what extent these methodologies are problematic for the decisionmaking process. The chapter concludes that it is time for law and economics scholars to re-think the cost-benefit paradigm by seriously reforming it or switching to a different mode of ‘rationalizing’ risk regulation.

Keywords: risk regulation, cost-benefit analysis, libertarian paternalism, risk assessment, law and economics, Regulatory Impact Analysis, monetization

JEL Classification: D61, D62, K23, K32