Using Risk Assessment, Benefit-Cost Analysis, and Real Options to Implement a Precautionary Principle
Risk assessment is an established methodology for environmental and public health issues. However, economists' core approach to both risk assessment and risk management, benefit-cost analysis, often fails to transparently evaluate variability in a way that is a trademark of quantitative risk assessment. Concurrently, environmental advocates are proposing new management criteria based on a vaguely framed “Precautionary Principle.” This manuscript demonstrates how risk assessment techniques for characterizing variability, benefit-cost analysis, and decision-making criteria under uncertainty and irreversibility can be combined. The result is a quantifiable, case-specific, and risk-dependent “precautionary” threshold for action compared to standard benefit-cost approaches. The Clean Air Act and the regulation of genetically modified corn provide applications.