The Risk Management Dilemma

Market processes play a central and constructive role in allocating risks, but impediments such as inaccurately perceived risks and externalities create a potential role for government intervention. Individuals overestimate small risks, are averse to imprecisely understood risks, and give excessive weight to errors of commission over errors of omission. The challenge for the government is to strike an appropriate balance in its risk regulation efforts and to avoid institutionalizing common irrational responses to risk. Excessive expenditures on risk reduction, often undertaken by or required by government, not only squander resources but also may increase risks to us all; they can divert expenditures that could have been used to enhance our standard of living and, directly or indirectly, our health. Risk equity concerns often prove problematic: they may direct excessive attention to unimportant risks and hinder efforts to deploy resources to produce the greatest gains in societal health status.