Optimal Public Policies to Minimize Risks of Genotoxic Harms: A Comparison of the Efficiency of Administrative Agency Regulation and Tort Liability

Genotoxins, both radiation and chemical, by their nature have great capacity for creating unintended third-party harms (externalities), which are difficult to control from a policy standpoint. The difficulties presented by genotoxins stem from 1) the long latency between exposure and the resulting harm; 2) the potential that the size of the harm might be greater than the capitalized value of its generator (e.g., the Johns-Manville asbestosis cases in the U.S.A.); 3) the inability in many cases to determine the population exposed to the genotoxin and the extent of individual exposures. An additional difficulty that plagues environmental control policies in general, not just those targeted at genotoxins, is the inability to monitor without error. To be effective, policies to control genotoxins must deal with the uncertainty created be these difficulties in order to assure that risk generators (generators, users, and possibly disposers of genotoxins) take the proper level of precaution in their activities. A model of the behavior of risk generators is created to analyze the economic efficiency of alternative policies for controlling external effects of genotoxin use under conditions of the uncertainty. The two broad policy categories examined are ex ante regulation (e.g., taxes, operational competency tests, and safety standards) and potential ex post exposure to financial liability for harms. A stochastic simulation of this behavioral model was then undertaken. This analysis gives rise to several unique findings. First, that due to uncertainty an economically efficient level of precaution in the use of genotoxins will not be taken by risk generators when only ex post policy of strict liability is employed. This finding holds for the case of probabilistic causation as well. Second, that if either ex post strict liability with punitive damages or ex post strict liability with an uncertain ex ante regulation is used the minimum of the firm's costs will occur at the social optimum, but the firm's loss function will have nonconvexities. Third, given simultaneous use of ex post strict liability with the appropriate level of punitive damages and an appropriate uncertain ex ante regulation the global minimum of the firm's costs will occur at the social optimum. Fourth, the use of ex ante regulation with ex post liability results in marked nonconvexities at the low levels of precaution. This finding may point to the desirability of using punitive damages as a corrective to strict liability.