Precautionary principle - The economic perspective

How should society deal with risks when there is scientific uncertainty abo ut the size of these risks? There has been much recent discussion of the Pr ecautionary Principle, which states that lack of full scientific knowledge should not be used as a reason to postpone cost-effective preventive measur es. We show in this paper that the Precautionary Principle contradicts one important intuition about the right way to act in the face of risk, namely the principle of 'looking before you leap'. When we expect to learn more ab out the future, the effectiveness of our preventive measures will be greate r if we learn before we act. However, a number of other ways of taking unce rtainly into account are consistent with a reasonable interpretation of the Precautionary Principle. First, Postponing preventive measures may increas e our vulnerability to damage, which induces a precautionary motive for ris k-prevention, similar to the precautionary savings motive. Secondly, strong er preventive actions often yield more flexibility for the future, so that acting early, has an option value. Thirdly when better information comes fr om a process of learning-by-doing, the risk associated with early events is amplified by the information thy yield about the future. This plays a role analogous to that of an increase in risk aversion, making its more cautiou s. Fourthly, because imperfect knowledge of the risk makes it difficult to insure, the social cost of risk should include a risk premium. Finally, unc ertainty about the economic environment enjoyed by future generations shoul d be taken into account. This raises the benefit of acting early to prevent long-term risks. If the Precautionary Principle sometimes gives good and sometimes gives bad advice, there is no escape from the need to undertake a careful cost-benef it analysis. We show that standard cost-benefit analysis can be refined to take account of scientific uncertainty, in ways that balance the Precaution ary Principle fits of waiting to learn before we act. Furthermore, it is im portant against the benefits of waiting to learn before we act. Furthermore , it is important that thy be used to do so, for instinct is an unreliable guide in such circumstances. Abandoning cost-benefit analysis in favour of simple maxims can result in some seriously misleading conclusions.