Health and Safety And Environmental Risks Regulation

 Health, Safety and Environmental Risks Regulation

  1. Introduction

There was a wave of health, safety and environmental risk regulation in the early 1970s. New regulatory agencies were established by the United States government with a wide regulatory responsibility on matters concerning risk and environmental policy (Viscusi, 2006). Some of the new federal regulatory bodies established by the government are; Occupation Safety and Health Administration (OSHA), Environment Protection Agency (EPA) and Consumer Product Safety Commission (CPSC) among other agencies. The federal government regulations on the environment and safety are aimed at protecting people against harm. These regulations have yielded numerous benefits. However, they carry tremendous costs to implement and maintain. Nonetheless, despite this fact, there is a wide gap between those advocating for the maximization of the scarce resources and those who want this put in practice in enforcing U.S regulatory programs (Calandrillo, 2001).

The agencies established by the government addressed issues concerning risks facing people such as morbidity and mortality risks. Along with this, others concentrated on hazards to natural resources that have a direct effect on people. These agencies were not created as a result of an unprecedented increase in the risk levels of the society. According to the national safety authority individual mortality risks of all kinds had been declining steadily throughout the twentieth century and this continues to be observed (Viscusi, 2006). However, this observation was not observed in the environmental risks. Environmental pollutant had been observed to increase until environmental regulations and agencies were created (Viscusi, 2006).

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According to Viscusi (2006), courts roles in respect to risks were observed to increase after the establishment of regulatory agencies and risk regulations. Viscusi observes that liability insurance premiums increased tremendously leading to calls of a liability crisis in the mid-1980s. The opposing argument was that the rise in the premium rates is as a result of normal ebb as well as flow of insurance industry. There have been observed a synergistic relationship between regulations and litigation over the years in a number of industries. This has been observed mostly in the cigarette industry. This relationship between litigation and regulation has evoked quite a controversy. However, the general agreement is that health, safety, and environmental regulation should exist. Nonetheless the main question is over the regulatory action targets, the necessary intervention modes and how strict should these regulations be. Therefore there is need to have a balance on the reduction of risk as well as cost and how to maximize the welfare of the society. There is a conflict on how to achieve maximum social welfare at minimum costs and efficient regulations.

Market performance is a key determinant of the necessary interventions that are applied by the government through regulations and tort liability. This is a result of market failures that necessitates these interventions. These interventions are assessed using the model of rational individual choice. This is how people make decisions in regard to markets. In case the markets function perfectly and choices are fully rational, this provides a very important reference point on what to tradeoff between cost and risk. It is also observed that regulatory policies are not always efficient. Therefore it is always good to conduct a Risk – risk analysis.  This is where the risk increasing aspect of a risk is weighed in contrast to the risk reduction outcomes of the regulation (Viscusi & Gayer, 2002).

The main aim of this thesis is; to identify sources of market failure of regulations on the environment, health and safety, to identify decision procedures for regulatory measures and to identify how the government implements these regulations. The first topic of this thesis covers introduction, which encompasses issues concerning regulation, aims of this thesis and structure of the thesis. Chapter two is comprised of sources of market failure which includes imperfect perception of risk, irrational behavior, and addiction, externalities and modes of intervention. Chapter three discusses decision procedures necessary for regulatory measures. This includes cost-benefit analysis, risk analysis as well as commonalities and differences. Chapter four consists of implementation and government regulations, which includes enforcement and performance of government regulations, implementation difficulties, and reform. Chapter five consists of conclusions.

  1. Sources of market failure
    • imperfect perfect risk

2.1.1 Biases in Risk Beliefs

The term market failure is used to define problems that cannot be solved by the mere existence of a free market. If people don’t understand the risks that are involved there is high probability that individual choice they are going to display biasness in accordance to their risk beliefs. This is true because people rarely know the exact risks that arise from their risky decisions. Nonetheless, such ignorance does not always indicate the presence of a market failure that would necessitate a regulation or a tort of liability. The nature and extent of a problem and its effect on decision in comparison to people’s choice must be examined first to make an accurate information reference point (Arnould & Grabowski, 1981).

Occasionally risk perceptions do not matter if they are accurate or that sensible choices are arrived at as a result of the risk. An essential issue on how people show systematic biases on their perception of risks affects market systems as well as gives rise to compensating wage differentials. People will tend to overestimate events that have low probability of occurring and underestimate risks that have a high probability (Viscusi, 1993). For example, in labor market the focus is based on how much wage the workers require so as to accept risks. This is based on the people’s willingness to pay for risk reduction (Viscusi, et al., 1987). According to Viscusi, et al.,(1987), when individuals are presented with a risk change they may require a large financial inducement so as to accept an increase in risk from what they are used to. This greatly exceeds their willingness to pay for higher reductions in risk even though these tradeoffs should be identical. This influence may have arisen from the perception bias from the people (Viscusi, et al., 1987). Risk perceptions reduce the rate at which individuals relate higher changes in the risk. In expressions of estimated compensating wage differentials, workers will always demand less amounts for compensation for every unit of actual risk faced since rise in risk is higher than it is believed (Viscusi, et al., 1987).

For example, take a market situation of a product where there is risk R* for injury from the product. From a previous risk model, R* matches to the equivalent of 1-π(s, h); therefore if a consumer displays an assessment of the risk that is subjective represented by p, and γ is the associated precision, where it represents number of draws that are equivalent to Bernoulli urn which is reflected in the subjective beliefs of an individual. Probabilistic beliefs that are more precise are represented by higher values of γ. The mere fact that people are not fully informed and have inherent subjective risk beliefs does not necessarily imply that individuals will underrate risk and engage in behaviors that are too risky (Viscusi & Gayer, 2002).

In most literature, the roles played by regulation and tort liability on risk often hypothesize individuals underrating risks. However, this is not the case as these patterns do not always hold on. Risk underrated by individuals is not always implied by the errors in risk beliefs of peoples. These risk beliefs biases are not always random but display variation in various systematic ways. Magnitude of risk is an important risk dimension. For example, the general pattern in the case of mortality risk is that people will overestimate minute risks along with underestimating huge risks. Market failure assessment arises from the notion of underrating risk and as a result depends on risk level. This is the risk levels that are associated perceptions of the risk that are associated by a particular market.

Zero reduction of risk has additional benefits to decision-makers in risk regulation. When a risk is absolutely removed there would be no need of factoring risk presence when making a decision. Government regulators consider this phenomenon when making an important decision. Researchers have referred the phenomenon where people overreact as a result increased risk as reference risk bias as well as status quo bias. Product changes that will increase risk, therefore, tend to produce a response that is exaggerated (Samuelson & R, 1988). This, therefore, necessitates for a higher tradeoff rather than substantial risk reduction. People may, therefore, be willing to pay reduced values for substantial reductions in product risks. People will, however, refuse to purchase a product as a result of small increase in risk levels. They would demand a substantial decrease in the price of the product for them to purchase the product. Publicity is another factor that leads to overestimation of risks as well. All risks are not always known in precision. Therefore the risk beliefs are not the only thing that is consequential but also the levels of their precision. However, the role of how tight these risks are is examined under risk ambiguity (Viscusi, 1998).

2.1.2 Risk Ambiguity

From the numerous sources of literature most biasness in the way, people treat risk originate from how ambiguous the risk is. The Ellsberg paradox explains the situations that lead to display of biases by individuals (Khuon, 2012). In the Ellsberg paradox, people are considered to be so risk-averse such that they choose to stick with bad situations rather than face uncertain conditions.

The term ambiguity is a variable that is subjective. Nonetheless, it should be possible to objectively recognize situations that are likely to present high ambiguity. This is through highlighting cases where there is scarce information, or unreliable and conflicting information, where different people expectations differ widely or confidence level estimates are very low (Ellsberg, 1961). Ellsberg focuses on the attitude of people in respect to risks that are ambiguous. These are risks where subjective judgment arises as a result of probability p representing information asymmetry. Situations where an opportunity to win a prize is presented to individuals, Ellsberg result is that people have a preference to accurate probabilities. If there is a chance of people incurring a loss, they will display ambiguity to probabilities of adverse effects. According to Ellsberg (1961), in cases where ambiguous risks exist, such as the case of mad cow disease , people would be expected to show ambiguity or be unwilling to acquire imprecise hazards as compared to those of the same magnitude that are precisely understood. The reluctance of people to incur risks that is ambiguous will accordingly prevent them from making market choices that are efficient. When risks are well-identified along with not being understood, people will incur too small risks. Biasness in the formulation of policies by government is observed as a result of citizen preferences and therefore asserting pressure on the government. This results from the governments’ irrational responses to these ambiguous risks. Focusing on the particular character of risk instead of hazard magnitude reflects how ambiguity aversion of risk has moved from irrationality of an academic interest to government tool of policymaking.

The character of risk in market context is dependent on the lack of full information. In most cases, hazards are comprised of events that have low probability of occurrence and risk that are not understood. These attributes make people to be more unwilling to incur these risks (Viscusi, 1998).

  • Irrational Behavior and Addiction

Most analysis of market failure and conditions regarding to decisions of risk involve inadequate information about the risk. However, there are other weaknesses of the choices. Addiction is one of the most prominent. This generally concerns market situations where consumption of a good leads to greater preferences in levels of the good and consumption of that good in the future. Changing the consumption pattern leads to substantial costs. This makes it difficult for consumption behavior of individuals to change. Some of the behaviors that have formed case studies for study of addiction are smoking, drug use and drinking.  A market failure with reverence to addiction relies on the type of choices. People anticipate their own addiction in future and make rational choices to become addicted according to the rational addiction models (Gruber & koszegi, 2001). Market failure is not involved necessarily in fully anticipated addictions. This is so because people may rationally choose to get addicted to a product even though relinquishing addiction is expensive along with the product being harmful itself. Basic models of addiction recognize that consumption of commodities that are addictive ct in the current period is dependent on previous period’s consumption of the good ct-1 (Chaloupka, et al., n.d).

Irrational behavior models in a similar manner provide similar assumption on the intertemporal reliance of consumption. When people chose to become addicted there is a differentiating feature that is observed in rational models. This is the fact that these people will anticipate that their current consumption will ultimately increase their future consumption ct+1.  In contrast to this there is an argument that addicted individuals are in continuous battle for self control. This argument observes that if people are myopic and place insignificant weight on themselves, then will behave in ways that will lead to addictive tendencies. This is the reason that leads to regulations or heavy taxations of products that are highly addictive (Schelling, 1993). Gruber & koszegi, 2001 hypothesizes market failure where individuals suffer from inconsistencies in their choices as a result of time. The main reason for regulating products that are addictive generally depends on the social implications of addiction to the society in general. Certainly, potential harm is also an important consideration in this decision. Nonetheless, addiction also leads to other costs. For example, drunk drivers may kill pedestrians and other pedestrians and drug addicts may lead to crimes so as to support their behaviors. Most regulatory activities of addictive habits are in most cases cojoined by externalities.

  • Externalities

The reason behind government regulations in these fields is because of the presence of externalities. Environment pollution is one of the most common source and example of externality. However, externalities also exist in other areas as well. For instance, in work environment the risky behavior of some of the workers may lead injuries of co-workers. This thus led to government issuing regulations on good work practices and conditions.

An organization that generates an externality on a third party have to chose its activity level so as to maximize profit as well as remodel the difference its exerting on its benefits and costs. When the third party that is receiving the externality is the public, and regulatory or liability sanctions are not exerted, this will lead to marginal costs exceeding social costs and thus the company will be engaging in twin risky behaviors. Consequently, a regulatory or liability sanction will give rise to a higher level of care through imposing a higher marginal cost to the organization (Cohen, 1986).

Externalities cannot always be observed in a negative aspect, there is externality consumption of a positive aspect. This observation is mainly in protcetive equipments such as helmets. Individuals are most likely to be reuctant to use them on their own because this will show weakness especially if it is a case of a contact sport. Despite this, if a high a number of players can be convinced to wear them, individual will thus voluntarily start using them. Individual choices in an observed market brings about a less preferred outcome consequently leading to a poor payoff to all individuals. This is opposite of a regulated outcome where peoples behavior is controlled so as to give rise to a positive externality (Viscusi & Gayer, 2002).

In other cases, both positive and negative externality can be generated by-products. A good example is the financial costs associated with cigarrettes. The morbidity effects as well as premature  mortality effects of smokers is high in comparison to non smokers. Consequently externalities that increase social costs such as sick leaves and medical costs increases are incurred. In some situations there exists positive and negative externalities that exhibit diverse trajectories over time. This makes the intertemporal weights seems to have more impact with the exception of situations of simpler externality. A good example is air pollution which exerts a net external cost. In regard to the self financing characteristic of externalities of cigarette smoking, caution must be emphasized on the benefits and costs distribution. This is because these varies depending on the specific externality (Cohen, 1986). Therefore, while there may be no overall financial externality that is adverse, individuals responsible for all the components may not benefit. Despite all this, caution must be exercised while generalizing results attainned in the case of cigarette smoking to other products. However, alcohol consumption may exhibit similar properties because its consumption in excess makes it a riskier product to consumers. A dominant concern to drunk drivers, in this case, is the substantial costs that are imposed on them. This makes the externalities- negative associated with alcohol be largely displayed (Manning, et al., 1989).

  • Modes of Intervention

All possible market interventions will not necessarily be deemed successful in improving market conditions just because there exists a market failure. This is because the present inefficiency may be too small or the intervention would not be benefitial. There are various forms of different interventions that can be applied in cases where there is need for intervention. These issues are concerned with the choice between litigation and regulation. There are various forms of regukation that a regulator may adopt depending on the institutional structure of the regulator (Shavell, 2004).

For example if a consumer decides to purchase a product which is dangerous and has an actual risk p* and p as the perceived risk, and p is less than p*. If the cost of the product is c and the income of the consumer is y. If the product does not cause injury, for consuming the product the consumer receives utility u ( y – c ). Utility v ( y – c ) if the product causes injury to the consumer. Likewise, the consumer may decide not to consume the product and experience utility x (y). If the adverse effects associated with the consumption of the product generates a social cost which is denoted by g, then g will occur with a probability p*. The consumer purchases the risky product only if:

  • p) u (y – c) + pv (y – c) > x(y)

However, this purchase will only be socially acceptable if;

(1 –p*) u(y-c) +p* v(y – c)-pg >x(y)

In such a choice problem to a consumer, there are two sources of market failure. This leads to a disproportion between private decision and valuations in the social decisions. Supply of information by the government could be used to remedy this disparity (Viscusi, 2006). The drive for this intervention is through supply of information could originate voluntarily from the market forces. However, if this is not sufficient enough a government regulation can make it mandatory to disclose information. A good example is the mandatory disclosure of nutritional labeling in most food products.

Tax or penalty regimes are another form of market interventions that can be used in private and social incentives. In the consumer’s choice problem, in this case the regulation will be tailored in such a way that it will provide risk levels that individuals can only chose if they have full information on the risks associated with the product. They would also take into consideration external costs imposed due to their choices. The most prominent of these interventions are “sin” taxes that are imposed on alcohol and cigarettes (OECD, 2000).

Direct government intervention is another form of intervention in cases of market failure. These regulations take various forms and are enforced by different agencies. These regulations may involve the use financial incentives in monetary values or market oriented systems. Either tort liability also plays a role in many cases. The costs for liability will generate same motivation for safety adherence same to those arising from financial incentives from a regulation. Moreover, regulations with financial aspects have an effect on innovations because the firms level of research and development increases with liability costs as well as new products patents. However when these liability costs are too high they become counterproductive.


  1. Decision Procedure for Regulatory Measures
    • Cost Benefit Analysis

For one to conduct a cost benefit analysis, a value has to be assigned to the benefit accrued by the regulation. In most health and safety regulations the most important concern is prevention of deaths (Viscusi & Gayer, 2002). A cost benefit analysis weighs the benefits accrued by a new regulation against the total costs arising from the implementation of the regulation. However many agencies are against the employment of a cost – benefit approach. For example the EPA asserts that this approach does not ultimately serve the society’s goal. This is as reflected by the congress’ Clean Air Act which aims to protect the air resources of the nation with the aim of promoting public health alongside social welfare. Nonetheless, such a goal is questioned as it is not in the nation’s interest when it is unaccompanied by contrasting benefits and costs that will be incurred as a result of the regulation (Calandrillo, 2001).

Every regulation gives rise to effects that can be categorized into two components. Foremost, regulations bring about costs to a firm. This has a ripple effect in that it will affect individual income. In a convectional cost benefit analysis of a regulation this cost effect forms one of its component. On the other hand individual risk taking decisions are affected by the costs. The second component of this cost benefit analysis is the benefit component. This is the effect that originates from the safety levels of a regulation. Safety levels that are higher are believed to decrease compensating differentials in wages as well as decreasing investment incentives on mortality enhancing infrastructures. For example higher safety levels can have a net effect on decreased health facilities investment. Government policies therefore will to balance these two effects so as to a desirable outcome (Viscusi, 1994). For a desirable benefit cost test of a policy the regulation must display a favorable effect on the expected utility of the individual. The representative individual, in practice represents a composite group of different individuals. From a regulation, parties benefiting from it may be different from those incurring the regulatory costs. A health care, for example, may display a greater marginal effect on mortality rates of individuals with low level of incomes (Viscusi, 1994).

For a regulation to pass the economic efficiency test, the minimum benefits must exceed the costs. In an ideal situation the allocation between benefits and costs must be maximized so that a regulation can pass this test (Hamilton & Viscusi, 1999). If the cost of a mortality reducing regulation is assumed to be c in the current period, and the average mortality risk reduction is s, affected people are represented by n and values of statistical life (VSL) is represented by v. In an ideal situation a policy or a regulation should be aimed at maximizing allocation between costs and benefits. This is represented by the maximum difference snv – c. Rarely do regulators hold on to this standard, rather they meet the requirement that benefits should always be more than the costs, that is;

snv > c. This test is justified, but it is not always convincing. In a lot of literature the concerns expressed about the benefit cost tests of public finance relates to Hicks – Kaldor criteria of compensation. This is the principle where gainers in a regulation are not always compensating the losers. In such a situation the intervention applied is not favorable to individuals having their welfare reduced.

Deviations from the approach of the benefit cost of a regulation are more diverse. One of the most notable is in the transportation safety regulation in that they must the cost- benefit test. That is;

S > c/nv

Alternatively the reduction of the risk must surpass the cost of the policy when divided by the affected population as well as being multiplied by VSL. Risk policies in contrast are governed by,

S >S*, where S* is the critical risk probability regulation.

In cost effectiveness terms, the benefit cost test can be written as c/sn ˂v, or life saved per cost is less than the critical value v. The relative performance of a regulation is characterized using this performance. This formulation can be used to assess the performance of a regulation in cases where individuals are reluctant to commit a specific VSL, v.

A person equates cost per unit risk in different areas of risk reduction actions in an efficient risk reduction regulation. For instance if a regulation imposes an unwarranted cost for every life saved it can only be justified if an individual is willing to spend more in order to acquire a facility that is marginally safer. Theoretical foundations of a market based methodology in estimation of v are articulated through this approach. Price risk as well as wage risk substitution values are mirrored based on market decisions. This thus makes it possible to estimate the value of v (Viscusi, 1994).

If in the benefit cost component an element of multiple time periods is introduced, then a time dimension t arises. Therefore if r is assumed to be the discount rate, then the cost benefit test on regulations imposing initial costs c at t is equal to zero will generate a stream benefit over time. In this case the VSL does not change over time, and could only change if there are effects on the income for example. Appropriate discount rates arouse controversies as well as what discount rate should be. This is so especially when it is concerned with environmental regulations and policies. The controversy on discounting rate is concerned on how future generations would be treated. Some literature puts arguments that future generations should not be discounted. The dilemma in this case is at what time does a generation end and another one start. For example if the current generation ends at T time and the future one starts at T+1, how will T value be determined?  In addition, even if the value of T is determined how will discounted benefits to future generation imply about a policy criterion (Viscusi, 2006).

The benefit values of goods that are not traded in the market evokes controversy in that they will be undervalued and the costs associated with them may be overestimated. The concern on the undervaluing of benefits is largely predated by survey valuation methods of development that allow researchers to estimate benefits as too high rather than low. On the cost issue policymakers can learn from the past biases on their estimation.

  • Risk Analysis
    • Definition of the Concept

In regulatory situations there frequently exist different kinds of tradeoffs. A good example is prescription approvals of new drugs by FDA which focuses on the efficacy and safety of these drugs (Viscusi & Gayer, 2002). An efficient regulatory policy is highly unlikely to achieve. Therefore a less strict method of evaluating a risk would be risk- risk analysis. This is where the increase of the risk aspect of a regulation is compared against the reduction of risk by the regulation. Adoption of such an analysis promotes promulgation of regulations. This would result in the overall reduction of risk in the society. Various regulations are aimed at reducing risks to life; however there are some instances where new risks are created. An example is a case where a consumer may encounter a traffic accident and get injured while returning the car to the dealership as part of a recall (Graham, et al., 1992). Another example will be the introduction of new regulations in the construction and manufacturing activities which may lead to initial injuries as a result of these efforts. Therefore highly inefficient regulations have a highly probability of creating more risks than the way they reduce these risks. An intensive form of risk- risk analysis relates to how economic results exhibit a good relationship between individuals health and wealth. Costs are imposed on the society by regulations, thus leading to re-allocation of resources that would have been used on goods consumption. In case of health facilities it would have an impact of health enhancing. If a regulation diverts resources that are used to enhance health, then an impact that harms individual health is observed (Viscusi & Gayer, 2002).

In a case of UAW v OSHA in 1991, a D.C appellate judge Stephen Williams used risk – risk estimates to make a ruling on the OSHA’s safety standards on accidental startups of machines that were hazardous and perceived resulting to rise in deaths. He used explicitly the risk- risk regulatory criteria so as to suspend the reviewed OSHA proposed workplace regulations concerning air contaminants (Viscusi & Gayer, 2002). However in a later senate committee on Government Affairs and the General Accounting office (GAO) provided an advice deterring the use risk – risk analysis with a view that it constituted a benefit cost analysis. Cost per-life regulatory threshold adoption is roughly an order of size and larger than the value of life. This seems lenient as it permits issuance of regulations with safety- enhancing benefits that have minimum costs. On considering a large number of regulations enforced in the previous decade concerning health and safety does not meet the lenient tests of regulatory requirements.

Different methods used to estimate tradeoffs in the risk – risk approach can only be recognized through the theoretical linkages of statistical value of life from the side of saving a life alongside that of income loss level that would subsequently lead to a loss of statistical life. A regulation should thus enhance safety or lead to a probability of survival that is greater than zero at the very minimum if it does not pass the benefit cost test. The components of survival are the marginal effect of a safety level induced by regulation, the marginal effect of safety in decreasing investments in health as well as the financial cost effect of regulation on risk. This is due to positive income demand elasticity on health expenditures (Viscusi, 2006). If people reduce their precautionary behaviors as a response to a regulation, its intended effect may therefore be unrealized. In this respect therefore there exists a moral hazard component in respect to safety enhancing regulations which are associated with a particular precautionary behavior.

In an analysis of how individuals respond to regulations on seatbelts, it is hypothesized that seatbelts have an effect of decreasing risk level. This would in turn lead to decrease in the level of care that drivers would employ. This therefore reduces and possibly eliminates the benefits of seatbelts safety. According to Viscusi this relationship can be highlighted with a simple model. Where f represents the stringency of a government policy or regulation and e the other determinant is the safety related effort of an individual. Therefore the overall probability for an accident risks p (e, f). Higher levels of both e and f reduce the risk of an accident at a diminishing rate.  A monetary equivalent loss z is imposed when accident occurs resulting to an injury. A cost v (e) is imposed on an individual as a result of taking a precautionary measure, where both v’, v” > 0. Incomes of individuals in this model whose effort and harm are given a monetary value have an income denoted by y. if the value of f is given as well as e, then;

Max Z = [1 – p (e, f)] [i – v (e)] + p (e, f)[I – v(e) – Z], (Viscusi, 2006)

Behavioral response extents are empirical in nature.


  • Mortality- Income Relationship

Income elasticities and equations of demand in engaging in very risky behaviors indicates a measure of causal relationships and are significantly not confounded by absence of certain variables. Another assumption is that the increase in mortality is predicted to occur alongside decline in the income. This occurs almost in the same time as income declines. However income changes have an effect on the risky behaviors of individuals which in turn affect the mortality risk observed after some time. Nonetheless, the length of time in which the mortality risks changes can be quite considerable (Lutter, et al., 2000).

According to Lutter, Viscusi, & Hahn, 2000, mortality increases as a result of income changes can only be manifested several years after the initial income changes occurred. Another assumption by these authors is in respect to regulations is that estimated induced rise in mortality assumes that costs are evenly distributed. This is important because the impact of income on mortalkity rates is high among low income earners as opposed to high income earners. If the costs were thus allocated disproportionately among the rich then induced rise in mortality rates would be lower.if on the other hand, the costs fall disproportionately to the poor the estimates of induced increase mortality risk is conservative. Costs are assumed to be distributed neutrally among  all the income groups in another assumption by Lutter et al., (2000). On this assumption, it is noted that accepted views about cost of environmental programs are regressively distributed somehow.

In the estimation of induced mortalities, two approaches that deal with benefit categories other than mortality are applied. In the first category, benefits are simply ignored because they are small. Secondly, they are assumed to have the same effects as mortality as an increase in income is subtracted from the costs. Induced mortality estimates are uncertain and so are the benefits that are associated with environmental, health and safety regulations. Therefore implications of uncertainity in estimates of induced mortality in a risk appraisal that takes into account uncertainity sources are examined (Viscusi, 1994).

Availability of regulations that impose very high costs for every life saved are considered a waste of  economic resources as they may harm health of individuals. According to Viscusi, there exists a major pattern of empirical data on great life expectancy and other health associated status that arise as result of affluence. This is on the notion that the government may divert a lot of resources by establishing regulations that incur these resources as costs. These resources could be used in health enhancing infrastructures as well as improved health care and safer products. Therefore sometimes pursuing a regulatory policy may have a counterproductive impact on health facilities.

  • The Value of Life Linkage

Road crashes claims a lot of lifes throughout the world. Majority of the fatalities occurs through vulnerable roads users, that is pedestrians, motorcyclists and cyclists. These fatalities are only assumed to increased over time. Assumption underlying this is that road safety historic trends will continue. However there are actions that can be taken to decrease fatalities.                                   Nonetheless these actions are not always easy to justify. This is unless the benefits being acrued are justified and that road safety improvements can be quantified. Governments must therefore make informed decisions in regards to investment in traffic safety (Viscusi, 1993). It is therefore important that road traffic improvements benefits are quantified and monetized so as to be compared with the costs. However, this requires the values in the reduction of risks of death be estimated. In an ideal situation the reduction of the risk of death in an accident in a traffic should be valued through what a person is willing to pay for it. The loss in income to the persons family alongside othe loss of the enjoyment of the rest of ones life are some of the costs an individual pays. Estimates of willingness to pay so as to reduce death risks, foregone earnings through the human capital approach method is used to value lost lives. However, this brings about a concern in that the value of improvements in the road safety may be understated. In estimating the value of road safety improvements, the approach that is more reasonable is to confront peple with the choices they make on daily basis such as purchasing a motor vehicle that has safety enhancementsand the value they place after making such choices (World Bank, 2006).

In a survey of commuters by World Bank, (2006), in Delhi, India found that the willingness of people to pay inorder to reduce their risks of dying increased with their income alongside their education levels. Either their willingness to pay is elastic with the mangnitude of the risk change valued.

  • commonalities and Differences

Cost benefit analysis is the same as cost-effectiveness analysis. It must emphasizes on how different actors aim to achieve a goal a cost – effective way. For example in traditional pollution control mechanisms firms are required to limit pollution at a level where reduction is achieved in a technology that promotes cost effective way. Firms are given flexibility to choose a method thatr will achieve this goal. On the other hand risk – risk analysis is a health health analysis that evaluates regulation in the same synoptic view as cost benefit analysis. However it contrasts with cost benefit analysis in that all policy impacts are translated in financial or monetary values. The foundation of this analysis is that regulations creates as well as reduces risks. Therefore, analysts seeks to establish tradeoffs that arise from environmental, health and safety regulations (Kysar, 2001).

  1. Implementation of Government Regulations
    • The Enforcement and Performance of Government Regulations

The efficiency in which the government regulations have been implemented is largely presented in cost effectiveness statistics (Morral III, 2003). This is as represented below from a table adopted from Morral III (2003);

Opportunity Costs per Statistical Life Saved (OCSLS)

Regulation Year issued agency OCSLs

(millions of 2002 $)

Child proof lighters                                         1993                CPSC              0.1

Logging Operations                                        1994                OSHA-S         0.1

Electrical safety                                              1990                 OSHA-S         0.1

Steering Column Protection                            1967                  NHTSA         0.2

Trihalometers                                                  1979                EPA               0.3

Food Labeling Regulations                             1993                FDA               0.4

Stability & Control during Breaking/Trucks               1995                NHTSA           0.4

Passive Restraints/Belts                                              1984                NHTSA           0.5

Underground Construction                                         1983                OSHA-S         0.5

Alcohol & Drug Control                                             1985                FRA                0.9

Medical Devices                                                         1996                FDA                1.1

Trenching and Excavation                                          1989                OSHA-S         2.1

Benzene/Fugitive Emissions                                       1984                EPA                3.7

EDB Drinking Water Sts                                            1991                EPA                6.0

TABLE 1 adopted from Morral III, (2003).

A substantial amount of expenditure have been used by the government with the expectation  that modest effects on reduction of risk under a number of assumptions. First it is assumed that the behavioral responces have no offsetting effects on the efficiency health and safety standards. For example the driving habits of drivers do not become riskier as a result of using safety belts. Secondly, the effects of risk – risk analysis arises from the fact that regulations divert expenditures and resources necessary for enhancing health and this is not taken into account (Arnould & Grabowski, 1981). Thirdly in analysing the performance of government , it is assumed that there will be full compliance with regard to the regulatory standard. If regulations have a significant cost of compliance there is no assurance that firms will allocate resources so as to ensure that there is compliance.

It is not socially optimal to have regulation enforcements aimed at achieving full compliance because these enforcements are costly. Cohen, (1987), model minimizes the total social costs, in a government social welfare maximizing agency. This includes the damages on environment and other costs such as clean up costs, monitoring expenses and detection expenses. These are costs are those involved in oil industry and in situations of oil spill up. The regulator which in this case is a governm,ent agency is involved in the set up of penalties so as to maintain socially acceptable levels of safety. In an ideal situation the penalty that will be enforce is expected to be equal to the cost of damage of the environment along with the cost of clean up. The detection is not always perfect as well as monitoring and detection because of the given costs associated with enforcements. Therefore the penalties should be increased so as to provide an incentive that is appropriate (Cohen, 1987).

In practice when analyzing the cost of compliance, one has to consider the firms incentive for compliance. First risk neutral firms will comply with a regulation if the cost iof compliance is expected to be less than the costs of noncompliance. In addition to this; costs of compliance is less than probability of inspection  multiplied by number of violations per inspection and penalty per violation (Cohen, 1992). Firms will find it appropriate to comply with a regulation depending on the regulatory enforcement approach which varies significantly depending on the agency. Thus compliance is not only dependent on the costs of compliance. For instance the OSHA has received most of the focus as it is believed many firms under its jurisdiction have inadequate compliance with its regulations with reports of 0.01 compliance annually (Cohen, 1992). On the other hand the inspection strategy of EPA on water pollution employs annual inspections coupled with monthly discharge monitoring reports. This is opposed to OSHA where inspectors identify violations and end up introducing penalties (Cohen, 1992). Compliance of mass marketed products and prescription drugs is easy to monitor. Regulatory policies performance varies significantly due to differences and efficiency of enforcement approaches by different government agencies.

4.2     Difficulties in Implementing

Design of regulations may fail to elicit the desired level of compliance. These regulations fails to not only meet the desired objectives but also creates unrequired costs through their administration and implementation, they “eats” on confidence of regulations, rule of law as well as government and this generally leads to general undermining of other regulations and this could lead to a vicious cycle of failure to respect the rule of law (OECD, 2000).

Another challenge the government faces in its implementation of regulations by the targeted groups is the lack of understanding of laws and regulations, collapse in the belief of law, procedural injuystices,costs associated in the compliance of regulation, failure of deterring, incapacitation of those that are being regulated, failure of persuasion and civil society failure in their roles. Another challenge is failure of the government to design regulations while considering the characteristics inherrent to small and medium sized enterprises. Either diverse administrative and natinal cultures impact differently on compliance (OECD, 2000).

For individuals to comply with a regulation they need to first understand it. Policy makers in designing and development of a regulation are pressurized to issue new rules or collapse the existing ones so as to cover unforeseen situations or even addressing new problems. The overall effect of such a reaction is loss of simplicity and consequently the ability of the target groups to comply with the resulting regulatory structure. In addition to this the complexity of regulations increases the compliance costs.Voluntary compliance would likely be low if the costs of compliance are high. Factors that contribute are if the substantiive standards dictated by the regulation are too high, if the transition time is too short and if the regulation is too inflexible. People will lose confidence in overly legalistic regulation. This is when people have to comply with technical rules that in the eyes of people don’t appear to relate them to any useful purpose. Such regulations takes the form of regulatory unreasonableness or stringent and detailed regulations that don’t make sense as well as unresponsiveness regulations that do not consider arguments by other agencies. Rules that are overly technical can lead to high non- compliance through encouraging evation along with creative adaptation (OECD, 2000).

When regulations does not fit well with the existing market practices there is a likely of lower compliance rates. For example there would be need for a regulation to curb over-selling in insurance industry as it has become a nornm in the industry (OECD, 2000). The failure of enforcing and monitoring regulation may elicit non compliance. If random inspections are effected among the target group there would be lack of likelihood of future non- compliance. Nonetheless if the monitoring is not rigorous enough or it is not targeted on risky areas the regulation is likely to fail. According to OECD (2000), effectiveness of OSHA regulatory inspections have been found to be short. This is because inspections that are superficial check only on the firm’s injury records and this have little effect on rates of injury. Researchers have found that when people feel that the government or regulatory agencies are treating them unfairly they are likely to respond by refusing to comply with the regulations. Taxpayers in the United States have reported having been treated unfairly during audits thus indicating disclination to comply in future audits.

The government should not only rely on efficient drafting along with enforcement practices but also resources should be devoted on adequate implemetation policies so as to make the target groups comply.

  • Reforms and Outlook

Regulatory reforms are used to describe changes that would improve the quality of regulations and enhance perfomance, cost effective as well as legal quality of the regulations. The determination of success of a regulatory reform is whether it accomplishes the objectives of the regulation.  Inspite of the fact that there have been massive regulations and various formalities imposed by the government in the past decades, often the results have been too disappointing. Thus many governments and allied agencies have had to re-examine how kthey can effectively achieve the objectives of different regulations and policies using a combination of tools. Therefore in the recent past regulatory reforms have turned regulatory quality management from deregulation. This is with the aim of advancing efficiency, simplicity, flexibility as well as effectiveness of regulations alongside improving the total impact of regulatory systems so as to achieve social and economic goals of the regulations (OECD, 2000).

According to Estache et al.(2005), there are three main drivers behind the process regulatory reform. First, is the existence of a favorable ideology in comparison to the market driven reforms. Secondly, new perspectives are also brought out by technological advances as a result of rise of competition due to industry segments that were considered natural monopolies in their entirety. This status is however challenged as a result of advances in technology. Finally the financial crisis that have had a global effect have led to reduced financial sustainability of many inefficient public enterprises (Estache, et al., 2005).

An integral part of regulatory reform is the evaluation of individual regulations and taking steps that would avoid potential failures of a regulatory compliance. For a government or its affiliated agencies to improve regulatory compliance,an understanding of what the target population is doping in their real life have to exist. The design of the regulation should therefore be informed by this understanding. A regulation that is ineffective in meeting its objective is harmful to government, businesses along with consumers  as a non regulation or over regulated system. Firms and their clients expects government and its agencies to demonstrate that regulations are designed to be effective (OECD, 2000).

In 2011 the United States president announced a 21st regulatory system that aims at protecting public health alongside promoting economic growth, competitiveness as well as innovation. In this executive order on regulation it is noted that when developing regulations and rules the regulators must consider costs and decrease burdens to businesses and consumers. Either these rules or regulations must expand opportunities by allowing public participation and comments, simplify rules, enhance freedom of choice and make sure that the impetus for regulation is science (White house, 2011).

  1. Conclusion

In the analysis of safety, health and environmental risk regulations economics plays a key role. Market performance determines the necessary interventions that are required through regulations. These interventions are necessitated by market failures. Market failures are known to exist due to existence of information asymmetries, market externalities along with irrational choices by people. In cases where people don’t understand the risks that are involved there is always a probability that the choice they make exhibit biases depending on their risk beliefs. In some occasions such a bias indicates presence of market failure that necessitates regulation or a tort liability. This biasness in the way people treat a risk originate from the ambiguity of a risk. A risk is ambiguous as a result of lack of information about the risk to the target group. People are unwilling to acquire imprecise hazards in cases ambiguous risks as compared to risks of the same magnitude and are well understood. This reluctance by people to incur risks that is ambiguous in turn prevents them from making a market choice that is efficient. Therefore the character of risk in the context of market is dependent on information disclosure. Irrational behavior and addiction is another weakness in the market choices of individuals. Addiction is concerned with a market situation where consumption of a goodwill to greater preferences in levels of consumption of the said good in future. A market failure with respect to addiction is dependent on the type of choices individuals make. Smoking, drug use, and drinking are some of the behaviors that have formed case studies of addiction. Externalities also give rise to a market failure. Interventions in cases of market failures take different forms depending on the necessity for intervention. Tax or penalty regimes are some of market interventions that can be used in private and social structures. Another intervention can take the form of direct government intervention. These are interventions enforce by different government agencies. These are regulations that the form of monetary incentives or market oriented systems as well as tort liabilities.

For any policy development, it is always prudent to conduct an economic analysis of the regulation. It is also a norm to conduct an impact analysis of all prospective regulations. Economic analysis of benefits and costs may be used to inform a decision about a regulation. However, the restrictive legislative procedures of many agencies require that they adopt regulation objectives rather than relying on the balance of costs and benefits. Ex ante and ex post economic analysis of regulations is very important. This impact analysis forms a basis for the debates of regulatory policies, their enforcement as well as their administration. Cost-effectiveness comparisons have indicated that there is a possibility of increasing the benefits of a regulation at a less cost. Ex post economic analysis on the performance of regulation can be used to highlight the failures in enforcement and administration as well as provide evidence on behavioral response of the target group.

Regulations do not always have an economic objective but may have social objectives such as improving the environment, workplaces safety or efficiency of prescription drugs. The performance of a regulation hangs on the incentives it creates to enhance compliance alongside the incentives on individual to engage in behaviors that are risky thus reducing the regulation effectiveness. Risk – risk trade-off analysis and studies have indicated that there are important health related opportunity costs in relation to risk reduction regardless of the costs incurred.

Regulatory reforms are described as the changes that improve the quality of regulations, enhance its performance, cost effective as well as have a good legal quality. A regulatory reform is deemed to be successful if it achieves the objective of the regulation. Regulatory reform process has been driven by favorable ideologies in comparison to the market system, technology advances as well as financial sustainability of the regulations. When developing regulations and rules the regulators must consider costs and decrease burdens to businesses and consumers. Either these rules or regulations must expand opportunities by allowing public participation and comments, simplify rules, enhance freedom of choice and make sure that the impetus for regulation is sci


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