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BUSS 5292 Topic 5 Regulation: Effect on risk 代寫

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Risk Management
BUSS 5292
Topic 5
Regulation:
Effect on risk
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Course Facilitator: Kesten Green
Study Period 1, 2016
The private risk/public risk trade off
Public risks are…
“threats to human health or safety that are centrally
or mass-produced, broadly distributed, and largely
outside the individual risk bearer's direct
understanding and control.” (Huber 1985, p.277)
q?E.g., from mandatory or routine vaccination,
chlorination of water supply, dam, power
station, industrial emissions, pesticides,…
q?“Negative externalities” in economic parlance
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Externality:
Definition and effect
•?An externality refers to the
uncompensated impact of one person’s
actions on the wellbeing of a bystander.
•?Externalities cause markets to be
inefficient, and thus fail to maximise
total surplus.
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2
Externalities:
Bad or good for bystanders?
•?If the impact on the bystander is
adverse, the externality is called a
negative externality.
•?If the impact on the bystander is
beneficial, the externality is called a
positive externality.
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Theory on externalities and
market inefficiency
•?Negative externalities lead markets to
produce a larger quantity than is
socially desirable.
•?Positive externalities lead markets to
produce a smaller quantity than is
socially desirable.
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Negative externalities
•?Car exhaust
•?Cigarette smoking
•?Barking dogs (loud pets)
•?Lawn mowers
•?Loud neighbours
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3
Positive externalities
•?Immunizations
•?Beautiful buildings
•?Beautiful gardens
•?Smiling babies and happy kids
•?New technologies
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CO 2 : Positive externality?
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From p.11 Idso, C. (2013) The positive externalities of carbon dioxide.
Externality problems can be
solved privately
•?Moral codes and social sanctions
•?Charitable organisations
•?Integrating different types of businesses
•?Contracts between interested parties
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4
Private risks are voluntarily assumed
A by-product of voluntary exchange between
producers and consumers
E.g., from…
q?Working down a mine
q?Biking
q?Recreational mountain climbing
q?Driving
q?Smoking
q?Eating fruit
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Public risk, newness and unnaturalness
Risks that are...
q?involuntarily assumed
q?novel
q?manmade
Loom large ( are SCARY! )
But,...
q?Manmade risks replace natural and familar risks
that are more harmful!
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Assumptions behind
lawsuits and regulation
Courts, environmentalist lobby groups, affected
communities, and regulators tend to…
q?ignore the reduction in risk that results from new technologies,
mass production, and international trade
q?assume that new risks should not be tolerated,
q?sources of new risks should be banned or regulated,
q?those exposed to residual risks should be compensated, and
q?those responsible should be heavily penalised.
I.e., they falsely assume that new risks add to total risk.
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How best to protect
consumers?
Video [8:37] at
http://youtu.be/KgVvUz6mUkY
Ep. 7 - Who Protects the Consumer [1/7]. Milton Friedman's
Free to Choose (1980)
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General effects of
lawsuits and regulation
q?Increased supplier costs
q?Expensive insurance
q?Compliance costs
q?Expensive lawyers
Ø?Increased product prices
Ø?Lower demand from buyers
Ø?Quelling of supplier innovation
Ø?Older, more severe, more “natural” risks persist
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Risk preference and
offset hypothesis
q?“The offset hypothesis predicts consumers adapt
to innovations that improve safety by becoming
less vigilant about safety…
q?…We find that safety-conscious drivers are more
likely than other drivers to acquire airbags and
antilock brakes but these safety devices do not
have a significant effect on collisions or injuries,
suggesting drivers trade off enhanced safety for
speedier trips.”
Winston et al. (p. 83, 2006) Journal of Risk and Uncertainty
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What about information policy?
q?“The economics of information has identified an
important role for government to correct situations
where competition is not sufficient to reveal valuable
information to consumers…
q?... an empirical assessment of whether these—and
other information policies—have significantly reduced
the costs to consumers created by imperfect
information.
q?My conclusion,… is that government information
policies have amounted to weak solutions in search of
a problem.”
Winston (p. 704, 2008) Journal of Economic Literature
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Aspirin warning
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Commercial speech
•?Different from other speech?
•?Knowledge and motivations
–?Seller?
–?Buyer?
–?Regulator?
•?Evidence on speech restrictions
(mandates)
See Green, K. C. & Armstrong, J. S. (2012). Evidence on
the effects of mandatory disclaimers in advertising.
Journal of Public Policy and Marketing, 31, 293–304.
[With commentary, 305–324]
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Can people be trusted to do the
right thing?
Spontaneous order
•?Video [4:32 min]
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Chess pieces fallacy
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Adam Smith commented on the theorist
who…
“…seems to imagine that he can arrange
the different members of a great society
with as much ease as the hand
arranges the different pieces upon a
chess-board.” *
*Adam Smith (1976). The theory of moral sentiments.
Liberty Classics: Indianapolis
“In order to increase total net welfare, a regulator must:
(1)?know stakeholders’ endowments, relationships, and preferences;
(2)?determine in detail how the situation could be changed to the benefit of those
affected; design rules that will
(3)?produce the intended changes; but
(4)?not produce unintended changes
(e.g. graft, reduced competition, and suppression of innovation);
(5)?resist pressures to modify the rules in ways that would reduce the net benefit;
(6)?ensure that those affected by the rules know and understand them;
(7)?Establish rewards and punishments that ensure that the rules are followed;
(8)?establish fair procedures for resolving disputes arising from enforcement of the
rules;
(9)?change rules when the situation changes (e.g., due to inventions or natural
disasters); and
(10)?keep the administrative costs of the rules below the value of the benefits.”
From Green & Armstrong (2015) Regulating choice: The need for evidence (Submission 237 to the Australian
Senate Economics References Committee Inquiry into “Personal choice and community impacts”)
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Doing nothing
•?Government can do nothing at all if the
market failure is deemed small
compared to the imperfections of public
policies or government failure*.
*See Clifford Winston’s work on this.
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Deregulating
What happened when airlines, railroads, trucking,
telecommunications, cable TV, brokerage, and
natural gas were deregulated?
•?“…the evidence clearly shows that
microeconomists’ predictions that deregulation
would produce substantial benefits… have been
generally accurate; hence their predictions of
additional benefits from continuing the process
should be taken seriously.”
Winston (p. 1286, 1993) in Journal of Economic
Literature, available from
http://www.jstor.org/stable/2728241?
seq=24#page_scan_tab_contents
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