The Economics of Societal Decisions under Risk

Abstract

Societal decisions often involve risk: Should a new drug or pesticide be approved, given the unknown side-effects to human health and the environment? What principles should guide such decisions? This course provides the theoretical toolkit (in particular Cost-Benefit Analysis) for societal decision-making under risk and contrasts theoretical recommendation with the actual regulatory practice.

Objective

By the end of the course, students will be able to: 1. Name the building blocks of cost-benefit analysis under risk 2. Describe the connections and differences between welfare economics under uncertainty and cost-benefit analysis under risk 3. List real-world examples of risk regulation and explain differences between practice and theoretical recommendation 4. Analyze real-world risk-regulatory problems by breaking them up into relevant components 5. Select an appropriate framework for evaluating stylized risk regulatory tasks 6. Prepare a well-founded and comprehensive recommendation and discuss limitations and robustness In addition to these course-specific learning objectives, students shall also develop their skills in 7. Working successfully in a team: Agree on a topic for a joint project, execute the project together, and prepare a joint report 8. Convey complex information succinctly and effectively in a written report 9. Provide fellow students with useful feedback on their work

Content

01 Welcome and course logistic; Introduction to decision theory The Precautionary Principle: Basic narrative and context 02 Conceptual Foundation of Cost-Benefit Analysis (CBA) Reality of Risk Management: Pesticide regulation 03 Microeconomic Foundations of Cost-Benefit Analysis Reality of Risk Regulation: Violation of the equimarginal principle 04 Uncertainty in CBA: the dominant, naïve approach Risk Assessment in Practice 05 Value of Learning: sequential models of risk regulation Risk assessment: compatible with models of value of learning? 06 Option price and option value: Theory Option price and option value: Practice 07 Uncertainty and the social discount rate Discounting in the real world 08 Midterm Quiz [Student projects: Discuss which tool they use] 09 Welfare economics: utilitarianism and ex-ante egalitarianism Welfare economics: the long way from theory to practice 10 Risk-risk trade-off: theory and practice [Some time allocated to student projects] 11 Welfare economics beyond risk: ambiguity and alternatives Limitations of CBA: Climate Risk and fat tails 12 Political Economy of Risk Regulation: Actors and Incentives [Some time allocated to student projects] 13 International Dimension of Risk Regulation The reality of precaution 14 Project Presentations Wrap-up and outlook

Resources