October 01, 1999
In his recent monograph, subtitled "Risk Reduction Through Markets," Cato Scholar Peter VanDoren hits his mark. He explains, in a balanced discussion, what economics can do to advance current policy learning about regulating chemicals with toxic effects. Most of his conclusions will not surprise conservatives, who have long argued for a more economically oriented approach to toxic torts and environmental regulation. But this work is not polemical, and in many instances, admits that the author's arguments are simply value judgments based on his particular views on politics and equity.
VanDoren begins by explaining the limits of knowledge in this area. Because the effects of most substances that cause cancer or other observable effects that are harmful are quite small in magnitude, it is generally possible in conventional studies only to detect differences of 1 percent or greater.1 Thus, in many instances, VanDoren notes that uncertainty forces us to recognize that the optimal regulation of potentially hazardous substances will depend upon value judgments about whether "false positives" (wrongly concluding that a safe substance causes harm) are worse than "false negatives" (wrongly concluding that an unsafe substance does not cause harm) or vice versa. This is because, at a given sample size, there is an inevitable trade-off between false positives and false negatives (or in the terms of statistics, between Type I and Type II error). The only way to escape this trade-off is to increase the sample size in a study, but that is often prohibitively expensive, or even impossible. Indeed, given these constraints VanDoren notes that long-term exposure to tobacco smoke is the only harmful chemical agent whose effects have shown to be large and well-known.
Using research on cancer as a jumping-off point, Van Doren explains how much of current regulatory efforts are misguided as a matter of science. Current studies, for example, establish that the cancer risk of eating 32 grams of peanut butter is 75 times the cancer risk of drinking a liter of water contaminated with the same levels of trichloroethylene ("TCE") as found in the well water at issue in the litigation popularized in the book A Civil Action and the movie of the same title.2 Even more surprisingly to a lay person will be that eating one raw mushroom is 250 times more likely to cause cancer than drinking water contaminated with TCE in the same fashion as the Woburn, Massachusetts water in A Civil Action.
VanDoren patiently explains the debates about increases in overall cancer incidence, the types of biases that can be present in epidemiologic studies, and the controversy over whether animal test data are valid in predicting the incidence of harmful effects in humans. Going beyond the academic debates, VanDoren even explains in one particularly telling anecdote how the operational models used by administrative agencies often pose even greater problems for regulation. "In one experiment, a tracer gas was released from the Alaska pipeline terminus at Valdez. Actual exposure, as measured by personal badges, was compared with the predictions of the EPA dispersion model. The statistical correlation between them was near zero (-0.01), meaning the [EPA's] predictions were worthless."3
Early on in the book VanDoren begins to invoke the individualistic philosophy one would expect from a Cato scholar. For instance, Van Doren responds to the objections of the environmentalist mainstream that markets cannot effectively regulate the risks posed by hazardous substances, even when the facts about such substances are well-known, because the poor will often fail to take the precautions necessary to avoid or minimize the harmful effects. To VanDoren's mind, this confuses equity with efficiency. The problem identified by the environmentalists has nothing to do with efficiency -- the problem is that the poor -- by definition, people with less income -- have made a choice to accept a risk that those who are wealthier will pay to avoid. If this is a problem, says VanDoren, the solution is general income redistribution, not micro-redistribution in the name of a paternalistic environmentalism.
After separating out equity concerns, VanDoren introduces the central organizing principle of his book -- the distinction between private risks and public risks -- respectively, harmful agents whose effects are limited to a single person vs. those that create effects shared by other individuals. For instance, a private risk is exposure to a harmful pesticide used in a home garden whereas the presence of smog in the ambient air is a public risk. Different regulatory regimes should govern these two very different types of risk according to VanDoren. Private risks should be addressed by the tort system (in the form of a negligence or strict-liability rule) or not at all. And public risks should be addressed by government regulation, whether taxation, tradeable credits, or command-and-control limits.
VanDoren concludes that no single liability regime is appropriate for all harmful agents. Rather, the choice of the liability regime is very context-specific. In the absence of a legal system with such malleability, VanDoren recognizes that general rules of thumb will have to be employed. VanDoren openly admits that such choices will be based on value judgments. He then goes on to defend his value choices -- no liability at all for private risks, or more likely (because that solution is politically infeasible), a regime of negligence; and for public risks, tradeable credits. He justifies his choice of a negligence rule for private risks on the basis of promoting individual responsibility. His choice of tradeable credits to solve for public risks is more rooted in positive economics, however. Taxes are difficult to set at the right level because of problems with individuals accurately revealing their true preferences when private markets do not exist for the "good" in question. And VanDoren advances the standard criticisms of command-and-control regulation as unwieldy, and likely to lead to excessive regulation. VanDoren acknowledges that in some circumstances, class actions could solve for public risks, but argues that in cases where the number of defendants is too large, class actions will not be efficient, whereas as tradeable credits do not suffer from this deficiency.
Finally, Van Doren explores the private solution available to deal with any risks that fall through the cracks and are not effectively regulated by the tort system or by the government -- purchasing insurance. Once again, VanDoren starts out with the basics that should be familiar to most students of law and economics -- insurance must be designed to avoid the problems of moral hazard (engaging in risky behaviors precisely because insurance is available) and adverse selection (only those who most need insurance actually attempt to purchase it). Assuming market (or regulatory) mechanisms can be devised to circumvent these problems, VanDoren concedes that private insurance is generally not a perfect solution for most environmental hazards because injuries occur at unknown rates and individuals often cannot control their risk levels. But VanDoren notes that private insurance would be much more effective in solving for public and private risks if, at a macroeconomic level, government in the 1960s-70s had not pursued policies that raised and destabilized interest rates, and if environmental statutes such as CERCLA were exclusively forward-looking instead of designed to retroactively redistribute property rights. Those government policies have resulted in making most insurers unwilling to underwrite environmental risks.
Chemicals, Cancer, and Choices is a recommended and quick read (especially if the footnotes are checked only when one is curious about sources). It would be especially good to recommend to law students as a primer on the economics of toxic torts and environmental regulation. Like the famed teaching materials that trained a generation of elite lawyers (albeit at much greater length), Henry Hart's and Albert Sacks' The Legal Process, VanDoren's book explores the issue of which legal remedies are suited to solving which particular types of problems. The state of both legal and economic knowledge has advanced much since Hart and Sacks taught at Harvard, and VanDoren's book is a good window into what has been learned. The challenge is translating that learning into policy.
1. Defined as the difference between the incidence of the harmful effect being studied in a control group and a group exposed to the expected causal agent.
2. The risk here is defined in terms of a "HERP index," which is the lifetime daily exposure rate experienced by humans (in milligrams per kilogram of body weight) that lowers, by one-half, the percent of tumor-free animals in a bioassay experiment over a standard lifetime of the animal.
3. Peter VanDoren, Chemicals, Cancer, and Choices: Risk Reduction through Markets 17 (1999) (citation omitted).