Endogenous Risk and Environmental Policy

Jason F. Shogren, Thomas D. Crocker
April 1992  [92-WP 91]

The concept of endogenous risk implies that an individual can privately influence many of the hazards he or she confronts. This realization has profound impacts on environmental policy, which in the past has been driven by an assumption of exogenous risk. Three key interdependencies now come to the forefront and must be addressed explicitly by environmental managers. First, accepting the presence of endogenous risk means rejecting the traditional risk assessment-risk management bifurcation currently applied to environmental hazards; instead, it requires a simultaneous physical-economical model approach. Second, endogenous risk requires that both private and collective risk reduction actions be considered in benefit-cost analysis. Otherwise, risk reduction is undervalued. Third, endogenous risk demands recognition of the interdependence among private agents, in that protective measures by one agent can take the form of simply transferring risk across space or time to another agent. Failure to account for these three interdependencies will result in unintended consequences from well-intended policies.

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