363-1124-00L  The Economics of Societal Decisions under Risk

SemesterAutumn Semester 2019
LecturersD. Heyen
Periodicityyearly recurring course
Language of instructionEnglish


AbstractSocietal 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.
ObjectiveBy the end of the course, students will be able to:
1. Summarize the theory of cost-benefit analysis under risk by 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
Content17 Sep Welcome and course logistic; Introduction to decision theory
The Precautionary Principle: Basic narrative and context
24 Sep Conceptual Foundation of Cost-Benefit Analysis (CBA)
Reality of Risk Management: Pesticide regulation
01 Oct Microeconomic Foundations of Cost-Benefit Analysis
Reality of Risk Regulation: Violation of the equimarginal principle
08 Oct Uncertainty in CBA: the dominant, naïve approach
Risk Assessment in Practice
15 Oct Value of Learning: sequential models of risk regulation
Risk assessment: compatible with models of value of learning?
22 Oct Option price and option value: Theory
Option price and option value: Practice
29 Oct Uncertainty and the social discount rate
Discounting in the real world
05 Nov Midterm Quiz
[Student projects: Discuss which tool they use]
12 Nov Welfare economics: utilitarianism and ex-ante egalitarianism
Welfare economics: the long way from theory to practice
19 Nov Risk-risk trade-off: theory and practice
[Some time allocated to student projects]
26 Nov Welfare economics beyond risk: ambiguity and alternatives
Limitations of CBA: Climate Risk and fat tails
03 Dec Political Economy of Risk Regulation: Actors and Incentives
[Some time allocated to student projects]
10 Dec International Dimension of Risk Regulation
The reality of precaution
17 Dec Project Presentations
Wrap-up and outlook
Lecture notesn/a
LiteratureThe course is based on chapters of the following three books:

1. Boardman, Anthony E., David H. Greenberg, Aidan R. Vining, und David L. Weimer. Cost-benefit analysis: concepts and practice. Cambridge University Press, 2017.

2. Adler, Matthew D., und Marc Fleurbaey. The Oxford Handbook of Well-Being and Public Policy. Oxford University Press, 2016.

3. Wiener, Jonathan B., James Hammit, Michael Rogers, und Peter Sand. The reality of precaution: Comparing risk regulation in the United States and Europe. RFF Press, 2011.
Prerequisites / NoticeThe main prerequisite is an interest in understanding public policy making from a theoretical perspective. A basic knowledge of Microeconomics is helpful.