W5 - Environmental Risk Flashcards
(29 cards)
What are some common elements of environmental risk regulation? Give an example
Often low probability but high magnitude events
Not intentional or a regular by product of production
Not one person to blame
Example:
Samarco dam collapsed as profits>safety, killing people, many people jailed and compensation costs > $6bn
Give an overview on the socially acceptable (optimal) level of risk
Zero risk is not feasible, so regulation is about achieving optimal levels of risk so needs to incentivise an optimal level of precaution.
Even EU principle of precaution does not aim to achieve 0 risk
Define risk vs uncertainty, and objective vs subjective risk and some empirical insights on perception of risk
Risk is measurable, unlike uncertainty
Objective is a statistical relationship between exposure and an adverse event, although difficult to quantify as not many events occur
Subjective is what a person perceives risk to be
People tend to overestimate likelihood of low probability events and vice verse, and demand more compensation for being exposed to involuntary risk eg. air travel
Define risk premium
Financial compensation required to
make an individual as well off under a risky situation as under a risk-free one.
What are the 3 approaches to valuing risk and premiums
1) Observed behaviour - wage premiums for risky jobs, subjective risk but could be other driving factors for premium
2) Stated preferences - Surveys, subjective risk
3) Experts - Statistical analysis
Are expert assessments on estimating p(environmental risk) always useful?
Governments normally use them but expert opinions can be muddied by their values and mood, and they overestimate how objective they are, can improve by weighting opinions
Give the Coloumb & Zylerberg example of rare events and risk perception
Examined how 2011 Fukushima accident affected risk perceptions in UK by examining house prices between 20km (treatment group), and 20-100km (control group) away from a nuclear plant using DiD approach before and after the accident,
4% lower for treatment group, persistent although public support for nuclear recovered, much higher price effect for high value houses.
Give an overview of the 2 approaches to regulating risk
1) Ex ante regulation (regulatory standards)
- Ever present moral hazard, eg. cannot observe the behaviour of the captain of an oil tanker so asymmetric information
- Need for further instruments for low probability high damage situations
2) Ex post mechanisms
- Courts, criminal law focus on punishment and tort law where liability rules can adhere to the equi-marginal principle
- Insurance schemes, where risk is spread out and provide compensation
What are the EU and International criminal law responses to deter and punish environmental crime?
EU - Environmental Crime Directive (2024) establishes offence and penalties
International - Proposed ecocide as the 5th crime against peace under the Rome Statute
What did Becker say about rationally committing environmental crimes?
Commit an (environmental) crime if: g > p*S
g = gain
p = probability punishment
S = magnitude of punishment (fine or imprisonment)
Expected punishment: p.S
depends on principle agent dynamics for the company
What is the main and secondary aim of using liability as a regulatory tool?
Main - how to bring about optimal levels of precaution and provide optimal exposure to risk, liability to internalise the externality of risky behaviour by including cost of accident into cost benefit analysis of the agent undertaking risky behaviour
Secondary - compensate the victim
Give me an overview of the framework of minimising social costs (Calabresi) - Include the variables, 2 main costs, how to minimise costs using marginal curves, and finally how to find optimal level of precaution on the total cost graph
p = probability of an accident
x = level of precaution
A = magnitude of damage
w = marginal cost of precaution
2 main costs are 1) precaution costs. and 2) expected cost of accident.
So social costs is the sum of 1) + 2) = w.x + p(x).A. Aim to minimise social cost so set x where MC of precaution = MB of precaution (w = -p’(x)A).
Optimal level of precaution on total cost curve, social cost is a shallow u, set x to the min point.
Using Calebresi’s minimising social costs framework, how do agents act under no and strict liability. Give some critiques of strict liability
Only potential injurer can influence probability of accident from their level of precaution
No liability - only faces cost of precaution, so sets x = 0
Strict liability - faces entire social cost curve, so sets x = x*
Critisims of strict liability:
- Strong distributional effects: all ‘property rights’ are vested in the
victim so doesn’t account for potential reciprocal nature of externalities (Coase) ie. Victim could take precaution
- Establishing causality is difficult
- Assumes no transaction costs in legal system
Give an overview of the negligence standard and the relevant test used in US courts
Injurer liable for damages only if they took less than the right amount of precaution, which is determined by a judge. If less, faces entire social cost up until point of precaution, if more only faces precaution costs after there precaution level.
Learned Hand rule decided whether negligence has occurred.
If the cost of prevention < cost of accident you are liable. This rule is compatible with efficiency.
Liability depends on whether B (the precautionary burden) is less
than L (the loss) multiplied by P (the probability)
* Liable if: B < PL
Give an overview of the bilateral precaution model with example of pedestrian and motorist
Used in situations where both parties can take precaution measures. Achieves different result than unilateral under strict liability but the same under negligence.
Both a pedestrian and motorist can take precaution, so they are substitutes. Assuming diminishing returns to individual precaution (eg. looking left and right 2x vs 8x), under strict liability, liable party takes too much precaution and non liable takes none which . Example is the update to the Road Traffic Act, Highway code establishing a hierarchy, now I see pedestrian crossing without looking at all as liability is all on the cyclist/driver.
Under negligence, both parties could potentially face the full cost of accident so they each take just enough precaution to minimise their costs, taking the efficient level of precaution.
Is bilateral/unliteral better for policy choice?
Depends on situation, who can take meaningful precautionary measures?
Unilateral - optimal level under negligence and strict liability
Bilateral - optimal under only negligence
How do activity levels relate to probability of accident occurring? Who benefits from p(risk) going down?
As activity level increases, probability increases.
Only the residual bearer of risk benefits from decreased activity levels.
Give some factors that limit the effectiveness of liability law
Fairness - who should have the property rights based on equity?
Costs - courts are involved in all strict liability cases so if transaction costs of filing law suits are too high then precaution levels may be below x*.
Where is the legal standard of precaution? May take too much/little precaution due to ambiguity
Give an example of liability in practise
EU Environmental Liability Directive
Aim - prevent and remedy damages to environment
Based on polluter pays principle, so polluters meet their liability in 3 ways
1) Remediating damages themselves
2) Pay authority to do it
3) Prevent it
Strict liability for regulated activities causing damage, Fault based liability for other activities
When is direct regulation preferred to liability? Give 2 limitations of liability regimes
- For frequent hazards, as its more cost effective as less transaction costs
1) Suits are not always brought to court which dilutes incentive for precaution
2) If expected damages too high, just go bankrupt (judgement proof)
What is the rationale for combining regulation and liability approaches? I.e., what are the limitations of the single approaches, and how does combining them synergise strengths
Limitations of single approaches (alone)
Regulation - Difficult to use a single rule for all firms, so different precaution levels taken
Liability - Causality hard to prove
Combining gives a comprehensive ex ante & ex post approach, with baseline level of precaution for common harms, and liability for large accidents to provide incentive for firms to take optimal precaution based on their activities riskiness. Also allows slightly more lax regulation as liability takes care of it.
Good example is having both traffic laws and consequences for running someone over
Using a graph of Precaution levels against damage, split into 3 regions with regulation and liability curves, explain what approach produces precaution levels closer to socially optimal for each region - this shows what SINGLE approach is better per region
In general, look to what is closer to socially optimum
R1 - liability
R2 - regulation
R3 - liability
Regulation seeks to address the most common mid range accidents -
Using a graph of precaution levels against damage, show why a COMBINED regulation and liability approach is better than single approach
Can use a lower regulation standard as liability deals with the large accidents
Follow regulation line until liability is closer to socially optimum - gives effective precaution line
On average, combined is closer to socially optimum levels
