The Complexity of the Policy Problem

If there were just a single injury for policymakers to consider, then once that injury had occurred, the only relevant policy questions would pertain to equity. That is, the size of the pie would already be determined by the fact of the injury, and the remaining issues would involve what punishment (if any) the injurer deserved and what compensation (if any) the victim deserved.¹

In reality, of course, policymakers are concerned not with a single injurious event but with many such events over time—which gives rise to the efficiency question of minimizing the total cost associated with future injuries. That total includes not only the costs of the injuries themselves (in medical care, pain, decreased worker output, and so on) but also:

• Prevention costs (the costs of efforts to avoid injuries, which tend to raise the prices of goods and services);
• Transaction costs (the costs of legal and administrative resources, such as attorneys’ fees);
• Indirect costs to the economy (for example, from the disruptions caused by layoffs and bankruptcies); and
• Uncertainty costs (the burden of uncertainty for potential victims and potential injurers—since driving the rate of injuries down to zero would be ruinously expensive, if not impossible—as well as the transaction costs of reducing that burden through insurance or other risk-spreading mechanisms).

That sketch of the policy goals suggests the difficulties that policymakers face in seeking to address the personal and social costs of injuries. One potential problem is trade-offs between equity and efficiency. For example, a particular conception of fairness might hold that certain victims should not be considered responsible for exercising some forms of care, although it would be more efficient if they did so. Even within the single goal of efficiency, policy-makers may have trouble identifying the best approach, given that each approach might have different effects on injury costs, prevention costs, transaction costs, indirect costs, and uncertainty costs and that the relative importance of those costs might vary from one type of injury to another.

Table 2.

Under ideal market conditions, much of the policy problem—the part concerning injuries associated with economic activities—could be solved easily. In particular, market forces would achieve the efficiency goal for such injuries by minimizing the sum of the related costs: producers and employers would respond to consumers’ and workers’ preferences by taking all cost-effective measures to make their products and workplaces safer, and risk-averse people would buy insurance to eliminate the financial uncertainty surrounding the remaining risks. Any equity goals involving additional compensation of injury victims could be met through a government program of income transfers.²

In reality, the results produced by market forces can only approximate the efficient outcome, and the accuracy of that approximation depends in large part on how well potential victims understand the risks they face.³ Some risks (such as long-latency illnesses that result from exposure to new chemical substances) become apparent only years or decades after they are introduced into the economy. Other risks, though recognized by experts, are largely unknown or are not accurately taken into account because of biases in the way people process information about risk and uncertainty.

Incomplete information or understanding about risk raises the possibility that government intervention—through regulations or liability rules—can improve on the efficiency of market outcomes. There is no guarantee that it will do so, however. Whether it does depends on the strengths and weaknesses of the particular interventions, as discussed below.

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1. The equitable levels of punishment and compensation need not be the same, even in the case of fines and monetary awards. Depending on the facts of the case and on one’s conception of justice, the victim might be felt to deserve more or less than the injurer should pay, with any difference coming from or accruing to the government.

2. Even in that simpler world, society would still face the issue of minimizing the costs of “stranger” injuries—those unrelated to any economic transaction, such as injuries caused by a release of toxic gases from a chemical plant. Chemical companies certainly have incentives to maintain their reputations, but there is no presumption that such indirect effects accurately reflect the interests of potential victims.

3. It also depends on how well potential injurers understand the costs of their opportunities to reduce injury risks (that is, their “production functions” for safety). In practice, that factor is probably less of a constraint on the efficiency of market outcomes than is lack of understanding of risk on the part of potential victims and thus is less likely to provide a good rationale for government intervention.

Last reviewed October 2023