Public protection against misperceived risks: Insights from positive political economy

Citizens often misperceive the nature of risks they face and the impacts of alternative actions on those risks. For example, consumers may underestimate the probability of flood in their area, or they may underestimate the beneficial effect of passive restraints on the likelihood of automobile accident fatality. But recommendations that the government should mandate optimal purchases are often ignored by politicians or rejected in favor of direct public compensation. This paper uses some simple models of public choice to explain why other remedies are used; it explicitly accounts for the fact that the same ignorant consumer whose behavior would have to be constrained are the ones whom the politician must please. In a simple world-of-equals model, such consumer-voters may well favor the alternative devices of implicit mutual insurance and conditional payment. When voters are heterogeneous, the political equilibrium (if one exists) is shown to depend upon the distribution of voters by perceived net benefit of public action and of taxes. Public action may be least feasible exactly when it would do the most good.