Chemicals, Cancer, and Choices: Risk Reduction Through Markets 1882577787, 9781882577781

Table of contents :
Preliminaries......Page 1
Contents......Page 5
1 INTRODUCTION......Page 9
2 EFFECTS OF SYNTHETIC CHEMICAL EXPOSURES ON HUMAN HEALTH......Page 13
3 MANAGING PRIVATE RISKS FROM CHEMICAL EXPOSURES......Page 33
4 MANAGING PUBLIC RISKS FROM CHEMICAL EXPOSURES......Page 55
5 INSURANCE......Page 67
6 WHAT SHOULD BE DONE......Page 75
NOTES......Page 83
REFERENCES......Page 93
INDEX......Page 103

Citation preview

Risk Reduction through Markets by Peter VanDoren

Risk Reduction through Markets by Peter VanDoren

Washington, D.C.

Copyright © 1999 by the Cato Institute. All rights reserved. Library of Congress Cataloging-in-Publication Data VanDoren, Peter M. Chemicals, cancer, and choices : risk reduction through markets / by Peter VanDoren. p. cm. Includes bibliographical references and index. ISBN 1-882577-78-7 ISBN 1-882577-79-5 1. Health risk assessment. 2. Health risk assessment—Government policy—United States. 3. Health risk assessment—Economic aspects—United States. 4. Free enterprise—United States. 5. Environmental toxicology. I. Title. RA566.27 .V36 1999 615.9’02—dc21 99-26599 CIP Printed in the United States of America. CATO INSTITUTE 1000 Massachusetts Ave., N.W. Washington, D.C. 20001

Contents 1. INTRODUCTION

1

2. EFFECTS OF SYNTHETIC CHEMICAL EXPOSURES ON HUMAN HEALTH

5

3. MANAGING PRIVATE RISKS FROM CHEMICAL EXPOSURES

25

4. MANAGING PUBLIC RISKS FROM CHEMICAL EXPOSURES

47

5. INSURANCE

59

6. WHAT SHOULD BE DONE?

67

NOTES

75

REFERENCES

85

INDEX

95

v

Acknowledgments I wish to thank the institutions and individuals who assisted me in the preparation of this book. Julian Wolpert and Princeton University offered financial support during the early stages of the project. Mike Munger, Bill Keech, and Thomas Oatley read versions of the manuscript during meetings of the Political Economy Research Group at the University of North Carolina at Chapel Hill. Mike Gough, David Boaz, and Tom Palmer, all of the Cato Institute, provided thoughtful and supportive comments. Jason Cheever edited the entire manuscript and provided useful comments that only someone outside the Beltway could offer. Finally, I am eternally grateful to my wife, Catherine, for her support, love, and humor.

vii

1. Introduction Your health is in constant peril from exposure to a multitude of toxic chemicals. Or so it seems, as frequent media reports alert us to the dangers of eating alar-treated apples, drinking artificially sweetened coffee, ingesting certain laxatives, swimming in backyard pools, and pumping automotive gasoline (Ingersoll 1998; McGinley 1997b; McGinley 1997a; Halpert 1995). Each new warning generates an almost predictable public debate (Passell 1995; Kelly 1995; Cushman 1997; Kenney 1998). First, interventionists demand stricter government regulations to reduce our exposure to the new health risk. Pragmatists counter that the costs of such controls will swamp whatever benefits they might offer. Skeptics question the underlying study’s scientific validity and advocate waiting until better knowledge is obtained. Finally, the cautious wonder if uncertainty can excuse failing to protect the public health. How are we to sort through all the rhetoric that surrounds questions of science and health? Further scientific research will provide only limited answers to only some of the questions. Better studies can reduce—but not eliminate—our uncertainty about chemical side effects. Policymakers still will have to face tough decisions. In general, policy analysts examine sources of conflict in a market society and determine what the government might do to improve firm and consumer choices. This book examines the specific issue of chemicals in our modern industrial society and discusses how government can enhance public health. In this context, important policy issues include: How well does the market for synthetic chemicals operate? Are individuals and firms making efficient choices about chemical use and exposure?1 Are choices concerning chemical use and exposure subject to value or equity conflicts?2 If so, how should such disputes be resolved?

1

CHEMICALS, CANCER, AND CHOICES Although, under certain circumstances, an enlightened government theoretically could improve the efficiency of chemical markets, does government intervention suffer from ‘‘government failure’’ and, thus, not produce improvements (Stigler 1971; Posner 1974; Peltzman 1976; Becker 1983; Shepsle and Weingast 1984; Wolf 1993; Keech 1995)?

Chapter 2 examines the current state of scientific research into how chemical exposures affect human health. There are good human studies on only a few substances. Animal and bacterial studies are more plentiful but are a poor substitute. Furthermore, better research will contribute surprisingly little to many chemical exposure disputes, which involve equity conflicts and trade-offs falling in the realm of policy analysis. Chapter 3 focuses on those chemical exposure risks that are private goods.3 Individuals can choose to avoid dangers like pesticide-laden food by paying extra for pesticide-free food. But they can properly weigh risks only if they know the harmful effects of these chemicals. Unfortunately, citizens who obtained sufficient information through the market would have little time to do anything else. Courts enhance the operation of markets with common-law torts, but no single liability rule efficiently manages all chemical risks in all situations. Government bureaucracies attempt to enhance the operation of markets, but their one-size-fits-all command-and-control regulations are very flawed. Chapter 4 discusses chemical risks that are public goods.4 Risks like air pollution are collectively consumed, and individuals generally cannot avoid them simply by acquiring information and making choices. While torts and regulations theoretically can produce efficient levels of public exposure, they usually fall short. Regardless of what institutions govern human exposure to chemicals, residual exposure will exist. Risk-averse individuals will want to share that risk through insurance. Chapter 5 explains the operation of insurance markets, particularly environmental insurance markets. The federal ‘‘Superfund’’ program and certain court decisions have made insurers reluctant to write environmental insurance contracts. Until Congress and the courts stop confiscating wealth through arbitrary statutes and common-law decisions, the environmental liability insurance market will not work well. 2

Introduction Chapter 6 reviews the findings and makes policy recommendations. Conflicts about exposure to chemicals involve three value or political choices involving consent and property rights. First, who decides whether false-positive (declaring a safe substance to be harmful) or false-negative (declaring a harmful substance to be safe) errors are more costly? Second, should some citizens be taxed to augment the ability of others to purchase information about the effects of exposure? Third, what liability rules should govern the manufacture and sale of chemicals? In the case of chemical exposures that are private goods, government should provide information rather than regulation. And the negligence liability rule, rather than strict liability, should be applied. For collective exposures, government should create ambient quality standards to achieve the same cost-versus-health balance observed in private market decisions. The government should then auction emissions property rights to the highest bidders and distribute the proceeds to all citizens equally.

3

2. Effects of Synthetic Chemical Exposures on Human Health Exposure to synthetic1 chemicals, like any other activity, can be analyzed by using a cost-benefit framework. Rational individuals consume private goods if benefits exceed costs. Consumers can easily calculate the benefits of chemical use. Farmers compute how pesticides increase crop yields, and people appreciate the fact that chlorination produces bacteria-free water. It is more difficult to determine the costs of chemical use because, in addition to a commodity’s market price, there are less obvious costs, such as increased health risks. This chapter surveys the scientific literature and explains what is known about chemical exposures and human health. Issues of Statistical Inference Suppose we wanted to determine if a new drug reduces insomnia. We could conduct an experiment in which some subjects were exposed to the drug and compare their insomnia rate with that of a control group who were not exposed. If 2 of the 20 people in the exposed group reported insomnia (10 percent) and 3 of the 20 people in the control group reported insomnia (15 percent), we might attribute the 5 percent difference to the drug. But we could not be certain. The drug could have had no effect on sleep. Perhaps 5 of the 40 people in the experiment were insomniacs to begin with, and 3 of them just happened to be assigned to the control group. But we could boost our confidence by increasing the size of the groups. If there were 1,076 people in each group and we observed a 5 percent incidence difference, then we could be 95 percent certain that the drug had a positive effect.2 What if the drug’s effect were not so noticeable? Suppose we observed only a 1 percent incidence difference in our experiment? 5

CHEMICALS, CANCER, AND CHOICES With 1,076 people in each group, we could be only 63 percent confident that exposure to the drug caused a decrease in insomnia. To be 95 percent confident, we would need nearly 27,000 subjects in each group. To detect differences of 0.1 percent with 95 percent confidence requires 2.9 million subjects in each group. No one has ever conducted such a study because of the extraordinary expense.3 Given practical limits, we can detect only differences of at least 1 percent. Fortunately, drug effects are usually relatively large. But the increased cancer risks that concern regulatory authorities and many citizens are relatively small4 —usually much smaller than the level of risk that scientists confidently can distinguish from ‘‘background noise’’ (Kaldor and Day 1985, 79).5 Why 95 Percent Confident? Researchers usually decide how much an exposed group must differ from a control group before attributing the difference to the exposure rather than to mere sampling variation around a ‘‘true’’ result of no difference. Many scientists do not feel comfortable saying an exposed group differs significantly from a control group unless there is less than a 5 percent probability that the difference could have arisen through sampling variation.6 The 5 percent figure is no more magical than 4 percent or 6 percent; it is simply convention. Researchers can make two types of probabilistic inference errors: false positive and false negative. In human health research, false-positive errors occur if health differences between the two groups in a study are deemed the result of substance exposure even though the average result of repeated studies would show no health difference. False-negative errors occur if the opposite happens—that is, health differences between two groups in a study are deemed the result of sampling variation even though the average result of repeated studies would show a real health difference. More specifically, a false-positive error occurs if it is wrongly concluded that a safe chemical causes cancer. A false-negative error occurs if it is wrongly concluded that a carcinogen is safe. A troubling aspect of probabilistic error is that, for a given sample size, reducing the likelihood of one type of inference error increases the likelihood of the other type. If false-positive errors are minimized, false-negative errors are dramatically increased and vice versa. As we shall see, only by increasing sample size can we decrease the 6

Effects of Synthetic Chemical Exposures on Human Health

Figure 1 FALSE-POSITIVE AND -NEGATIVE ERRORS WITH SAMPLE SIZE ⳱ 50 True Difference: 0% True Difference: 5.2%

beta = 89%

Frequency of Observed Difference in Cancer Incidence Between Control and Experimental Groups

23%

alpha = 5%

0 For sample size = 50, to be 95% sure that an observed difference in cancer incidence between experimental and control groups indicates a true difference in incidence that is greater than zero, we must observe an incidence difference greater than 23%. The probability, however, of observing an incidence of less than 23% if the true difference is greater than zero but less than 23% varies from 50% to 95%. For example, if the true difference in incidence is 5.2%, the probability of observing values of less than 23% is about 89%.

(5.2)

10

20

30

True Difference in Cancer Incidence Between Control and Experimental Groups in Percent

alpha = Probability of False Positives beta = Probability of False Negatives

probability of one type of inference error while holding the other type constant. Figures 1 and 2 illustrate how the determination of false-positive and -negative inference errors varies with sample size. In Figure 1, the sample size is 50. To be 95 percent confident that an observed incidence difference between the experimental and control groups is really evidence of carcinogenicity rather than sampling variation, the difference in cancer rates between the two groups must be at least 23 percent. Limiting false-positive errors to 5 percent, however, increases the likelihood of false negatives. Assume, for instance, that the true incidence difference in the example shown in Figure 1 is 5.2 percent. To keep false positive errors to less than 5 percent, all differences of less than 23 percent are deemed too small to be the result of exposure. If the true difference in cancer incidence is, in fact, 5.2 percent, the probability of erroneously concluding that a substance is not a carcinogen is more than 89 percent.7 7

CHEMICALS, CANCER, AND CHOICES

Figure 2 FALSE-POSITIVE AND -NEGATIVE ERRORS WITH SAMPLE SIZE ⳱ 1,000 True Difference: 0% True Difference: 5.2%

beta = 50%

Frequency of Observed Difference in Cancer Incidence Between Control and Experimental Groups alpha = 5%

0

(5.2)

10

20

30

For sample size = 1,000, to be 95% sure that an observed True Difference in Cancer Incidence Between difference in cancer incidence between experimental Control and Experimental Groups in Percent and control groups indicates a true difference in incidence that is greater than zero, we must observe an incidence difference greater than 5.2%. The probability of observing alpha = Probability of False Positives an incidence of less than 5.2%, if the underlying true beta = Probability of False Negatives difference is 5.2%, is 50%.

Figure 2 shows the same analysis for a sample size of 1,000. To keep false-positive errors below 5 percent, we must observe incidence differences of only 5.2 percent instead of 23 percent. Let us again assume the true incidence difference is 5.2 percent. The probability of finding an incidence difference of less than 5.2 percent and erroneously exonerating a carcinogen now is only 50 percent instead of 89 percent. What About False-Negative Errors? Critics correctly argue that most scientists worry more about false positive errors than about false negatives. That concern inevitably increases false-negative errors (Green 1992; Latin 1988), and we incorrectly exonerate many carcinogens. As the actual truth gets closer to the null hypothesis (e.g., an incidence difference of 0 percent) and farther from the 5 percent falsepositive critical value (e.g., 23 percent in Figure 1), the probability of false-negative errors approaches 95 percent.8 On the other hand, the probability of false-negative errors approaches 50 percent as the actual truth gets farther from the null hypothesis and closer to the 5 percent false-positive critical value.9 8

Effects of Synthetic Chemical Exposures on Human Health For any given sample size, there is a zero-sum trade-off between false negatives and false positives. But as we increase the sample size, the 5 percent false-positive critical value shrinks, and the true incidence difference gets closer to the new critical value and relatively farther from the null hypothesis. Thus, the probability of false negatives is reduced while the probability of false positives remains constant. Notice that in the examples presented in Figures 1 and 2, with an assumed truth of 5.2 percent cancer incidence difference and a constant 5 percent probability of false-positive errors, the probability of false-negative errors fell from 89 to 50 percent as the sample size rose from 50 to 1,000. Optimal Emphasis on False Positives or False Negatives The choice between false-positive and -negative errors is a choice involving costs and benefits, like any other choice; not surprisingly, people disagree about the trade-offs.10 Some people believe that, in matters of public health, we should care about false negatives much more than false positives. That is, we should worry about the possibility of a substance causing cancer much more than the benefits lost if a substance is wrongly labeled a carcinogen and its consumption declines. Others take the opposite viewpoint. How should we evaluate such views? Chapter 3 argues that when chemical exposure is a private good, people can decide for themselves how to weigh the costs and benefits of erring in either direction. No public or private entity needs to decide the ‘‘correct’’ trade-off. In fact, no ‘‘correct’’ trade-off exists. Chapter 4 notes that matters become more complicated when we can collectively consume only one level of ambient exposure. Summary A generic problem in all studies of the effects of chemical exposures on health is the need to differentiate ‘‘real’’ effects from random ‘‘background noise.’’ Statistical variance in an experiment can result in a safe substance’s being declared hazardous. And vice versa. This causes two problems in cancer-risk policy. First, because the public (and, hence, policymakers) worries about small levels of increased cancer risk resulting from chemical exposures, the number of subjects required to differentiate small risks from zero risk is enormous, which makes the studies prohibitively expensive. Second, 9

CHEMICALS, CANCER, AND CHOICES there is an important (but usually unstated) conflict over the relative importance of false-positive and false-negative errors. Although scientists are the main participants in this debate, we must resort to extrascientific values to resolve it. Exposure Effects Obtained from Humans Drug Trials and Their Limitations A drug trial exposes randomly selected humans to varying doses of a chemical and compares their subsequent health with the health of randomly selected subjects who were not exposed. Researchers perform such true experiments because the potential benefits of determining a drug’s effectiveness offset the drug’s possible dangers. But in many cases scientists cannot use true experiments to study chemical effects on human health: ethical considerations prevent them from intentionally exposing people to chemicals that probably do more harm than good (National Research Council 1991; Green 1992). Instead, they attempt to mimic the precision of true experiments with alternative methodologies. Case-Control and Convenience-Cohort Studies In the commonly used retrospective case-control study, ‘‘cases’’ (e.g., patients with a particular cancer who enter a particular clinic) and ‘‘controls’’ (e.g., that clinic’s other patients) are asked to report their previous behavior and exposure to substances that might cause the disease.11 Medical schools prefer the case-control design for two reasons. First, it can easily be combined with the normal treatment of hospital patients since it simply divides patients into two groups and then asks some questions. Second, the disease incidence difference between the experimental and control groups is 100 percent: All members of the experimental group have the disease of interest, and none of the controls does. A 100 percent difference in disease incidence means researchers can distinguish small behavioral differences between cases and controls from random variation, even in relatively small samples. Epidemiologists also frequently use the convenience-cohort study, in which members of an identified group (e.g., nurses) are questioned about their disease incidence as well as their behavior, diet, work, 10

Effects of Synthetic Chemical Exposures on Human Health and recreation. A large study theoretically can correlate small differences in disease incidence with possible causes. A prominent example is the Harvard Medical School Nurses Study, in which 121,000 nurses periodically fill out written questionnaires (Feinstein 1988; Kass and Shapiro 1989). Limitations of Case-Control and Convenience-Cohort Studies Most human evidence concerning chemical effects on health comes from case-control and convenience-cohort studies rather than drug trials. But such studies can have serious flaws.12 Selection bias (i.e., unobserved heterogeneity) exists when case and control groups differ in unobservable ways because participants were assembled after the occurrence of the causal process rather than before. For example, because hazardous occupations generally employ healthier workers, the health of those workers before exposure to workplace hazards is not the same as the health of a control group of workers in nonhazardous occupations.13 Many diseases are ‘‘silent,’’ and people may not realize they are ill. Detection bias can exist if all subjects do not receive the same medical scrutiny.14 In retrospective case-control studies, detection bias occurs if the ‘‘cases’’ receive more intensive medical scrutiny than the ‘‘controls’’ and silent diseases in the control group more often remain undetected. Detection bias occurs in convenience-cohort studies when any measure of substance exposure is correlated with differences in medical scrutiny. For example, the positive relationship between reserpine (a blood pressure medication) and breast cancer might be attributable to the fact that women under treatment for high blood pressure are more likely to have breast exams, which detect otherwise silent breast cancers (Feinstein 1988, 1261). The same might be true of the relationship between alcohol intake and breast cancer, because alcohol could be a surrogate for income and more frequent breast cancer screening and mammography (Feinstein 1988, 1261). Both case-control and convenience-cohort studies will be biased if the recall of diagnosed patients systematically differs from the recall of others. For instance, case group members, who are struggling to determine why they have a disease, probably recall differently than controls, who may be in the hospital for more routine matters. 11

CHEMICALS, CANCER, AND CHOICES Limited Human Data on Effects of Specific Substances The best human studies on chemicals and cancer manage to avoid the problems Feinstein described and also measure differences in cancer rates of greater than 1 percent (Lave and Ennever 1990). The most famous of those studies examined the relationship between cigarette consumption and cancer in British physicians (Doll and Hill 1964; Doll and Peto 1978). Researchers also have calculated solid dose-response relationships for coke-oven emissions, aromatic amines, aflatoxin, vinyl chloride, radiation (including radon), and asbestos (Zeise, Wilson, and Crouch 1987, 275–89).15 Trends in Aggregate Human Cancer Rates Although causal evidence in humans of the link between chemical exposure and cancer is quite limited, one might expect that greater aggregate exposure to chemicals in an increasingly industrial society would cause higher aggregate cancer rates over time. The debate over trends in aggregate cancer incidence is heated and murky, in part because the players realize their statements about the ‘‘facts’’ have important public policy implications. Still, two distinct ‘‘sides’’ seem to have emerged. On one side, Doll and Peto (Doll and Peto 1981; Peto 1985; and Doll 1990) note that, for people under age 65, age-adjusted death certification rates have increased dramatically for lung cancer but stayed constant for other cancers. From tumor registry data, they conclude that age-adjusted incidence has increased dramatically for lung cancer, decreased dramatically for stomach and cervical cancer, and probably remained about the same for other nonrespiratory cancers (Doll and Peto 1981, 1211).16 Peto (1985, 12) says, It is particularly interesting to note that cancers of the breast and large intestine were about as common then [in the 1930s] as they are now. For these two diseases, the chief causes of the large differences between the U.S. and Japan presumably involve differences between the lifestyles that have existed throughout most of the present century. It is difficult to imagine what such factors might involve—nutritional and hormonal differences are perhaps the most promising hypotheses—but risk assessments for new synthetic chemicals do not appear to be an immediately attractive way of starting to investigate the problem.

12

Effects of Synthetic Chemical Exposures on Human Health On the other side, Davis (1989) and her colleague (Marshall 1990), as well as Bailar and Smith (1986a, 1986b), argue that aggregate cancer mortality rates are rising. Among those over age 65, deaths from brain cancer have doubled since 1970, and deaths from all cancers are rising for those over age 54 living in the United States, England, Wales, France, Germany, Japan, and West Germany.17 These analyses imply that exposure to environmental chemicals is responsible for increased cancer rates.18 Both sides discount data that contradict their positions. Because detection has improved with time, Doll (1990) argues that trends in incidence data and in mortality data among the elderly should be discounted, and that it is more useful to focus on mortality among the young (which indicates future trends) than on mortality among the elderly (which reflects past behavior and exposure). Doll and Peto discuss aggregate changes in cancer mortality excluding lung cancer19 and conclude that rates were lower in the 1986–1987 period than in the 1951–1955 period in both males under 65 and females under 45. Davis excludes stomach cancer—the incidence of which has decreased dramatically—from her analysis of those over 54 and concludes that cancer mortality is increasing (Marshall 1990). The ‘‘cancer-is-increasing’’ proponents also argue that the detection-bias argument used by Doll and Peto is just unsupported speculation (Marshall 1990, 902). I believe Doll and Peto’s arguments are persuasive, but their view that cancer data from the elderly should be discounted is logical rather than empirical. Summary The best evidence about the effects of chemical exposure on human health would come from clinical trials, but they are generally not used because of ethical concerns about experimentation on humans. Even when clinical drug trials are conducted, the prohibitive cost of large studies means that the smallest incidence change that can be detected is about 1 percent. Case-control and convenience-cohort studies are susceptible to unobserved differences between experimental- and control-group members. This leads to selection and detection bias, which accounts for the alternative explanations of the observed statistical relationship between exposure and disease incidence. The best individuallevel epidemiological studies go to great lengths to avoid bias, use large numbers of people, and study large exposures. 13

CHEMICALS, CANCER, AND CHOICES Change in aggregate cancer incidence is a poor substitute for individual-level data. Better medical treatment has meant better cancer detection, especially for the elderly. Death certificate data are more reliable than incidence data, but many researchers believe that elderly deaths have not been classified consistently over time. Finally, aggregate time-series data might tell more about exposure in the less relevant distant past than in the more relevant recent past. Exposure Effects Determined from Studies on Animals and Bacteria Difficulties in developing human evidence plus intense political pressure to fight the ‘‘cancer epidemic’’ have led to massive federal and industrial funding of experiments with animals and bacteria.20 In an animal test, researchers feed the test animals a substance and, if cancer rates differ statistically between the experimental and control groups, label the substance a carcinogen. In a bacterial test, researchers expose bacteria to a substance and, if genetic code mutation rates differ statistically between the experimental and control groups, label the substance a suspected carcinogen. Early hope that animal, and especially bacterial, tests would produce cheap and definitive information about the causes of cancer in humans has now faded. Disputes over tests are even more controversial than disputes over human evidence, and many scientists consider them unreliable. Design and Results of Animal Tests Animal experiments are governed by the same statistical limits as human drug trials. If one wants to detect smaller differences in cancer incidence between experimental and control groups, one needs to study more animals. Researchers who reduce costs by experimenting on fewer animals can be confident of detecting only large differences in cancer incidence between the experimental and control groups.21 Scientists induce large incidence differences with large exposures. Most animal tests are conducted at two dose levels: the maximum tolerated dose (MTD) or one-half the maximum tolerated dose (MTD/2).22 More than 1,000 chemicals have been tested on rats or mice in over 4,000 experiments. Ames created a Carcinogenic Potency Database (CPDB) with the results and made two observations (Marx 1990, 14

Effects of Synthetic Chemical Exposures on Human Health 743). First, of those chemicals tested in both rats and mice, many more synthetic chemicals (350) have been tested than natural plant products (77).23 Second, about half (58 percent) of all tested chemicals induce tumors in animals (Ames and Gold 1991c, 902), and this rate does not vary much whether the chemical is a natural plant product (48 percent) or a synthetic (61 percent) (Ames and Gold 1990a, 970). A Critique of the Current Animal Testing Program Critics make two points about using animal data in regulatory judgments concerning human exposure to chemicals.24 First, the high rate of carcinogenicity in animal results is an artifact of both the genetic characteristics of the animals and the high doses. Second, even if the animal results are valid, when combined with exposure data, they suggest that current regulatory priorities often ignore the greatest relative cancer risks. Cancer Is an Artifact Some critics suggest that high cancer rates in animal tests are an artifact of the animal strains used. Abelson (1993a) and Ames, Magaw, and Gold (1987, 276) argue that studies use a mouse strain (B6C3F1) very prone to liver cancer25 and use male rats susceptible to kidney tumors.26 Researchers discount test results from mouse strains less prone to cancer. Evidence that regulators should be concerned about trichloroethylene (TCE), the most common chemical in Superfund sites, comes from mouse data, although mice and humans metabolize TCE differently enough to make the relevance of the study data questionable. In addition, studies of workers who were exposed to TCE, a common dry-cleaning solvent, show no evidence of excessive cancer incidence (Abelson 1993a). Ames argues that the high rate of carcinogenicity, at least for nonmutagens, is an artifact of the high doses of chemicals (MTD and MTD/2) that animals eat.27 The large doses cause cell wounding and increased mitosis. Cancer ocurs when endogenous DNA damage28 is passed on to daughter cells, which would not occur in the absence of mitosis at lower doses.29 Human Risks Depend on Exposure Ames also uses the CPDB to create an index of the relative cancer risks humans face, given the potency of each chemical and the average human exposure (Ames, Magaw, and Gold 1987; Gold et al. 15

CHEMICALS, CANCER, AND CHOICES 1992).30 Each chemical is characterized by TD50, the daily exposure rate that reduces the number of tumor-free animals in an experiment by 50 percent (relative to the control group) at the end of the animal’s standard lifetime. To make the data more meaningful in human decision making, Ames expresses actual average daily human exposures as a percentage of the TD50 value (called the HERP index). Ames uses the HERP percentages to assess the relative carcinogenic character of various substances, given specified exposure levels.31 Table 1 shows HERP values for various substances in the order of their increasing carcinogenic potential, as calculated by Ames and his colleagues. It does not support the widely held belief that synthetic substances pose a greater health threat than natural substances. Some of the most carcinogenic compounds (given current human exposure levels) are natural products plants produce in their evolutionary struggle with fungi, insects, and animal predators. We ingest over 10,000 times the amount of these substances as we do of synthetic pesticides (Ames, Magaw, and Gold 1987, 272). But scientists, regulatory actors, and the public have shown little interest in their toxicology. Table 1 also illustrates other anomalies in public attitudes (Douglas and Wildavsky 1982). While workers are heavily exposed to dangerous chemicals, the public focuses on more trivial general pesticide and chemical contamination. In 1984, for instance, the Environmental Protection Agency banned the use of ethylene dibromide (EDB) for fumigation of grains and vegetables, but the Occupational Safety and Health Administration still permits workers who manufacture EDB to receive exposures above the TD50 level—a HERP greater than 1.0 (Ames, Magaw, and Gold 1987, 275). The chloroform that results from chlorination in ordinary municipal water is a greater carcinogenic threat than wells contaminated by the W. R. Grace Company in Woburn, Massachusetts (the subject of a lawsuit won by the complainant). Finally, voluntary ethanol consumption threatens health far more than the average exposure to any of the so-called synthetic toxic substances. Ethanol is the only nongenotoxic carcinogen (which might cause harm only at high doses as tumor promoters) that humans are exposed to in large doses. In contrast, the risk from low-level, chronic exposure to TCE, DDT, and PCBs might also be minimal. 16

Effects of Synthetic Chemical Exposures on Human Health Public concern about industrial chemical exposures might also be misguided.32 The EPA typically uses mathematical dispersion models to calculate human exposure to chemicals released into the air by major stationary sources like factories and power plants. There is little evidence that the models are predictive. In one experiment, a tracer gas was released from the Alaska pipeline terminus at Valdez. Actual exposure, as measured by personal exposure badges, was compared with the predictions of the EPA dispersion model. The statistical correlation between them was near zero (ⳮ0.01), meaning the predictions were worthless (Wallace 1993, 137–38). The EPA has conducted four major studies of actual human exposure using monitors worn by random samples of people. The results are shocking. Smoking, clothes that had been dry cleaned and hung in closets, and heated water in showers and clothes washers (i.e., chloroform from chlorinated water) are major sources of human exposure to volatile organic compounds (VOCs), all of which exceeded outdoor exposure sources by two to five times at the median exposure level. The major sources of exposure to another VOC, p-dichlorobenzene, are toilet fresheners and mothballs. Pesticide exposure stems from two main sources: (1) vapors emitted by soil into homes through basements and (2) soil tracked into buildings on shoes. Major stationary and mobile sources account for only 2 to 25 percent of personal exposure to the two dozen or so VOCs and pesticides that the EPA studied (Wallace 1993, 138; Ott and Roberts 1998). A Defense of the Animal Testing Program Defenders of current animal testing programs make several claims. First, almost all chemicals that cause cancer in humans also cause cancer in animals. Thus, all chemicals that cause cancer in animals eventually might prove to cause cancer in humans (Rall 1991, 10; Perera, Rall, and Weinstein 1991, 903). Second, evidence of organ toxicity, which seems to be an essential component of the Ames thesis concerning cell proliferation and cancer, was found in only 7 of 53 positive animal tests analyzed by Hoel and his colleagues (Cogliano et al. 1991, 606). Third, the argument that high cancer rates in animal tests are a direct consequence of cell division induced by the large doses used is only a hypothesis and should not be a factor in regulatory policy (Perera, Rall, and Weinstein 1991, 903). 17

18 0.0002* 0.0003* 0.0004 0.008* 0.006 0.003 0.004* 0.003 0.001* 0.004 0.6

PCB, 0.2 ␮g (U.S. average) DDE, 2.2 ␮g (U.S. average) EDB, 0.42 ␮g (U.S. average) Chloroform, 250 ␮g (average) Diethylnitrosamine, 0.1 ␮g Dimethylnitrosamine, 0.3 ␮g Trichloroethylene, 2800 ␮g Urethane, 43 ␮g Chloroform, 83 ␮g (U.S. average) Benzene, 155 ␮g Formaldehyde, 598 ␮g Allyl isothiocyanate, 4.6 mg

PCBs, daily dietary intake

DDE/DDT, daily dietary intake

EDB daily dietary intake (from grain)

Swimming pool, 1 hr

Bacon (cooked, 100 g)

Well water, 1 liter (worst well in Silicon Valley)

Sake

Tap water, 1 liter

Conventional home air (14 hr/day)

Brown Mustard, 5 g

0.07

HERP Value 0.0004* 0.0002* 0.0003*

Chemical Contaminant and Dose Trichloroethylene, 267 ␮g Chloroform, 12 ␮g Tetrachloroethylene, 21 ␮g

Exposure Source Well water, 1 liter (contaminated—Woburn, Mass.)

Table 1 RELATIVE CARCINOGENIC HAZARDS OF VARIOUS SUBSTANCES

19

0.03 0.03

Aflatoxin, 64 ng (U.S. average 2 ppb) Symphytine, 38 ␮g Hydrazines Estragole, 3.8 mg Ethyl alcohol, 18 ml Ethyl alcohol, 30 ml Formaldehyde, 6.1 mg Ethylene dibromide, 150 mg

Peanut butter, 32 g

Comfrey Herb Tea, 1 cup

Mushroom, 1 raw (15 g)

Basil, dried leaf, 1 g

Beer

Wine

Formaldehyde, worker’s daily intake

EDB, worker’s daily intake (high exposure)

HERP value 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. Asterisks imply that the substance acts as a promoter of cancer and is not genotoxic itself. SOURCE: Ames, Magaw, and Gold (1987, 273).

140.0

5.8

4.7*

2.8*

0.1

0.1

0.06*

Saccharin, 95 mg

Diet soda, 12 oz.

0.06

Dimethylnitrosamine, 7.9 ␮g

Dried squid, broiled in gas oven, 54 g

CHEMICALS, CANCER, AND CHOICES Fourth, Ames criticizes the results of the animal testing program as an artifact of the high doses, but he uses them to develop the HERP index (Perera, Rall, and Weinstein 1991, 903). Finally, even if we live in a sea of natural carcinogens developed by plants in their evolutionary struggle, humans might have evolved defenses against them, whereas human biochemistry might be seriously disrupted by recently introduced synthetic chemicals that are the appropriate focus of the policy debate (Davis 1989, 333; Weinstein 1991, 388; Gold et al. 1992, 261).33 Evaluation of the Debate The argument that animal results should be taken seriously in assessing human risks because almost all known human carcinogens are also animal carcinogens seems sensible, but it poses several problems. First, all known human carcinogens are not necessarily animal carcinogens. Doll and Peto (1981, 1215, 1225) state that cigarette smoke produced malignant tumors in animal inhalation tests only after extensive manipulation of the experiments and that ethanol still is not a carcinogen in any animal experiments. Second, even if all known human carcinogens were animal carcinogens,34 the argument is not a strictly scientific statement. Instead, it is a value claim that false positives are not as costly as false negatives.35 The lack of organ toxicity described by Hoel would seem to be a stronger argument against Ames’ position, but Ames and Gold (1990b, 1645) argue that cell proliferation—not toxicity—is the important variable, that cell proliferation can occur without toxicity, and that cell proliferation is not important in cells that are discarded (such as skin, hair, and intestine lining) or killed. The strongest aspects of the critique of Ames and his colleagues are the observations that many more synthetic chemicals have been tested than natural products, that the percentages of natural and synthetic compounds that induce tumors are similar, and that endogenous DNA damage spread to daughter cells (because of excessive cell mitosis) probably distorts results given the 40 percent incidence of tumors in typical control groups (Ames and Gold 1991c, 902). Another strength is the belief of Ames and his colleagues that regulators should weight a chemical’s cancer-causing potential with human exposure. Some scholars agree with Ames’ emphasis on 20

Effects of Synthetic Chemical Exposures on Human Health exposure, but question his reliance on the TD50 measure to rank carcinogenic potential for regulatory purposes. TD50 dose levels are very high relative to human exposure. Thus the HERP index, which is simply TD50 levels weighted by average human exposure, attempts to extrapolate effects in humans at low doses from effects observed in animals at high doses. But Wartenberg and Gallo (1990) argue that only under very restrictive mathematical assumptions can we expect the rank order of carcinogenic potency at TD50 doses to be similar to the rank order of very low doses.36 Gold, Bernstein, and Ames (1990) acknowledge this possibility but argue that, empirically, it does not alter their results. Subsequent work by Portier and Hoel (1987) suggests that the concerns of Wartenberg and Gallo have merit for weak carcinogens and chemicals that cause treatment-related toxicity in experimental animals. Bailer and Portier (1993) propose using a continuous index of tumorigenic potency (TI) rather than TD50 (which is a specific exposure level), because the former reduces ranking bias in experiments where treatment mortality is high and tumor lethality is low— exactly the experiments that most trouble Ames and his colleagues. In addition, the TI measure allows the functional form of the estimated dose-response function to be nonlinear, although the function at low doses is extrapolated from observed moderate- to high-dose data rather than estimated from actual low-dose observations. In a comparison of carcinogenic potency rankings using TD50 and the new TI index, the discrepancy becomes quite large if the assumption of a linear dose-response function is dropped. In particular, many compounds ranked low (strong carcinogens) by the statistically superior TI index are ranked high (weak carcinogens) under the TD50 method (Meier, Bailer, and Portier 1993). Thus, many results that support the Ames argument using the TD50 methodology do not hold when the TI index is used.37 Even if Ames and his critics accepted carcinogenic ranking based on the TI measure, I believe they still would debate which compounds to test (natural or synthetic), how to extrapolate (linearly or nonlinearly),38 and whether we ought to worry more about the need to protect the public from carcinogens or the need to allow products to be developed and sold in the marketplace. Defenders of current animal testing believe in linear extrapolation and the need to protect the public from industrial carcinogens.39 Critics believe animal test 21

CHEMICALS, CANCER, AND CHOICES results produce misleading inferences about human risk, especially for nonmutagens.40 Although the debates occur in scientific journals, they are as much about the researchers’ underlying views about risk aversion and policy choice as they are about ‘‘science.’’41 Bacteria Tests Applying substances to bacteria and checking for genetic damage—referred to as a short-term test or STT—is a cheap, fast alternative to animal testing, especially if one believes all carcinogens are mutagens and all mutagens are carcinogens. Tennant et al. (1987) conducted STTs with 73 chemicals that were part of the National Toxicology Program from 1976 through 1985. The results were not encouraging. The Ames assay using salmonella bacteria missed over half of the 44 chemicals that were positive in the NTP animal tests, and none of the three alternatives to the Ames test rectified that test’s mistakes without making other false-positive errors. The three most potent carcinogens of the 73 tested were not mutagens in any of the four STTs. In addition, three chemicals that were not carcinogens in the animal tests were positive in all the STTs. Not all rodent carcinogens are mutagens, nor are all in vitro mutagens animal carcinogens, but chemicals that are positive in one STT are positive in the other three STTs. If current in vitro STTs are expected to replace long-term rodent studies for the identification of chemical carcinogens, that expectation should be abandoned. STTs do, however, continue to offer an economical, rapid, and dependable means to detect genotoxic chemicals. (Tennant et al. 1987, 940)

Background Incidence of Cancer The health effects of synthetic chemical exposure must be discussed relative to some baseline, since the incidence of cancer would not be zero in their complete absence. Some cancers are caused by exposure to the sun or to naturally occurring radioactive isotopes.42 The estimated cancer incidence caused by these combined exposures is approximately 0.5 to 1.0 percent during a lifetime, with two-thirds of the exposure stemming from radon alone (Kocher and Hoffman 1991, 1989; National Council on Radiation Protection and Measurement 1987, 15, 53; International Commission on Radiological Protection 1991, 188). 22

Effects of Synthetic Chemical Exposures on Human Health Other sources of ‘‘background’’ cancer are trace levels of chemicals found in drinking water, food, building materials, and common activities. Such exposures are not natural, but they are ubiquitous because they are associated with elements of modern life that most people deem essential. For example, some of the chlorine used to chlorinate public drinking water forms chloroform. Vapors from dry-cleaned clothes (tetra- and trichloroethylene) mix with the air in closets. Building materials contain formaldehyde. Dioxins, furans, and PCBs are found in the food chain. Travis and Hester (1990) use the estimated lifetime exposures of the U.S. population to these ‘‘background’’ chemicals (as estimated by EPA exposure studies) combined with the estimated potency of the exposures (derived from the animal experiments of the NTP) to conclude that lifetime cancer risk from these chemical exposures is between 0.14 and 0.50 percent. If the risk from exposure to background chemicals is added to the risk from exposure to naturally occurring radioisotopes—the background incidence of cancer is between 1.0 and 1.5 percent in the U.S. population.43 Conclusion Long-term exposure to tobacco smoke is the only causal agent whose effects are large and reliably known (Doll and Peto 1981, 1257). We are fairly certain of the effects of exposure to large amounts of substances in the workplace, substances like aromatic amines, arsenic, asbestos, benzene, chloromethyl ether, bisulphan, cadmium, chromium, radiation, mustard gas, nickel, and vinyl chlorides (Doll and Peto 1981, 1203), but the aggregate number of people affected is small and is declining as ventilation and preventive action in factories improve. Diet may have major effects, but such effects are only the subject of speculation and do not result from ingesting trace amounts of powerful carcinogens (Doll and Peto 1981, 1258). Overall, caloric intake and fat content have a strong country-to-country statistical relationship with the incidence of colon and breast cancer, but the reasons for the relationship are unknown (Doll and Peto 1981, 1205). Evidence from animal studies combined with information on human exposure leads to the results in Table 1. Those results confirm the danger from high occupational exposures but also suggest that natural plant carcinogens create relative risks that are much larger 23

CHEMICALS, CANCER, AND CHOICES than those created by pesticide residues in food. In addition, the risks created by chlorinated tap water and the benzene and formaldehyde in indoor air are greater than the risks created by contaminated water at a typical Superfund site. Though scientists debate the human, animal, and bacterial evidence concerning carcinogens, many of their disagreements cannot be resolved scientifically. For example, ● Upon which compounds—natural or synthetic—should we focus our limited budgetary resources? ● How should regulators use research data, given the well-known design flaws of most studies and the mismatch between the small risks that concern policymakers and the risks those studies can detect? ● How should we extrapolate—linearly or nonlinearly—from cancer incidence induced by moderate or high exposure in animals to predict the rates that will occur in humans from much lower exposures? ● Should we be more concerned with the need to protect the public from carcinogens (i.e., minimize false-negative inference errors) or the need to allow products to be developed and sold in the marketplace (i.e., minimize false-positive inference errors)? These policy problems will not be resolved through more scientific investigation. ‘‘Better’’ science can only reduce statistical variance. Once that is accomplished, disagreements about value choices still remain. The next two chapters discuss how those disagreements might be resolved, first for private exposures and then for public ones.

24

3. Managing Private Risks from Chemical Exposures Proponents of government regulation question the equity and efficiency of information markets. This chapter examines information markets in which chemical risks are private goods1 (Cross, Byrd, and Lave 1991). First, using radon as an example, I demonstrate how markets develop to inform people about their exposure levels and to reduce those levels. I then discuss equity concerns and their policy ‘‘remedies’’ in the context of reducing radon exposure. Later, I examine efficiency issues in information markets. The common-law tort system, which exists to reduce the costs of managing damages from remote risks, is the subject of great scholarly and political dispute. I review the controversies, in general and in the context of chemicals. Finally, I consider whether command-and-control regulation by government agencies enhances the efficient use of information. Said differently, should we permit individuals to ignore government recommendations about private goods? Can Markets Effectively Disseminate Risk Information? Markets often provide suboptimal levels of product information because entrepreneurs who develop information have difficulty restricting its use to those who pay for it (Shavell 1987, 54). Although some recent scholarship challenges that idea (Kealey 1996), assume that basic epidemiological research requires public funding. Once that information exists, can private markets disseminate it? Many companies make substantial profits by gathering and distributing information about products and companies (Klein 1997). They bear the fixed costs of learning about the relevant basic research and then sell that knowledge to others at a lower marginal cost. The A.M. Best Company rates life insurance companies’ actuarial and investment practices. Moody’s rates the repayment risk of debt. 25

CHEMICALS, CANCER, AND CHOICES Underwriters Laboratories certifies electrical products. And Robert Parker tastes wines and sells his evaluations in his journal, The Wine Advocate.2 The Radon Example The ability of people to obtain information about private-good risks and take cost-effective precautions against them is illustrated by the public response to radon exposure.3 Once information about radon exposure risks became public and geologists asserted that the northeastern area of the United States was prone to radon release, companies were quickly started to measure residential radon levels and to install positive pressure systems to keep radon from seeping into basements. Because radon exposure varies widely from home to home, exposure information is a private rather than a public good, and a market developed to provide it. Basic information about the risks of radon exposure might be suboptimally provided by private markets, but the determination of exposure and the development of remediation plans are private goods that markets provide. Limited knowledge and high transaction costs prevent individuals from developing expertise about many remote risks. So entrepreneurs often fill the gaps. The ability to provide information about the risks of chemical exposure offers many profitable opportunities, as long as the exposure is a private good that varies among individuals.4 Are Risk-Information Markets Equitable? Some might argue that the radon example illustrates certain market flaws because many low-income families have not purchased radon detection and remediation systems. Such reasoning is incorrect. The radon detection and removal markets work well, but the distribution of income is such that some choose not to purchase these commodities. We should separate equity issues from efficiency issues. Poor people do not buy certain items because they have insufficient income, not because markets fail. Rather than modifying markets to ameliorate equity concerns, informed policy analysts generally prefer a variety of redistributive policies. All of those policies use 26

Managing Private Risks from Chemical Exposures coercion to tax some for the benefit of others, but they vary in how much they distort markets. The state could attack poverty by writing checks and letting recipients spend the funds as they see fit. To prevent purchases that might offend taxpayers, governments could issue vouchers for particular products, such as food stamps (Thurow 1976). Alternatively, governments could produce or subsidize particular commodities to be given away or sold at less than cost, such as consumer information pamphlets, low-cost housing, or radon removal systems for poor people.5 Finally, the state could require firms to produce particular commodities, such as risk or nutritional information (Lyndon 1989). Unlike explicit taxpayer subsidies, mandates appear to require firms rather than the beneficiaries to pay although economic analysis casts doubt on such a belief.6 But regardless of the real incidence of the costs of mandates, they appeal to elected officials because the results appear to be free to consumers and offend only a minority of taxpayers (those firms that have to provide the service).7 The failure of poor people to purchase risk information or riskreduction services is not evidence that information and risk-reduction markets do not work well. Poor people do not consume certain items because they do not have sufficient income, not because markets do not work well. Economically informed policy analysis argues that the state should not intervene in the interactions of particular markets to ameliorate equity concerns. If any redistribution occurs, it should be at the level of the economy as a whole and not in any particular market. Are Risk-Information Markets Efficient? Even if risk information is available through markets, consumers might not purchase it when risks are unlikely for any individual but real for the population as a whole. Ex ante, the costs of planning for remote contingencies might exceed the benefits (Shavell 1987, 55).8 We face prohibitive transaction costs in ascertaining how much care all the producers of all the products we consume have taken to reduce risks and how much care we should exercise ourselves. Each of us can do this for a few situations, like radon exposure, but not for every remote risk.9 27

CHEMICALS, CANCER, AND CHOICES In the absence of transaction costs, the market would include more product choices, some with higher prices but lower risks and others with lower prices but higher risks. If the cost of informing consumers about reducing risk through product choices were less than their willingness to pay, some firms would offer safer products (Landes and Posner 1987, 276–77). In the presence of transaction costs, however, certain safety efforts that represent real trade gains do not occur through simple market forces because of the excessive costs of considering all risks and how to reduce them. Liability Rules Are a Response to Transaction Costs Common law and its liability rules offer a possible solution to excessive transaction costs. Under liability rules, courts expend resources after damages occur to determine their causes and whether everyone involved acted in a cost-effective, damage-reducing manner. This saves society from gathering information about damage contingencies that never occur.10 In effect, these rules maximize economic welfare when knowledge or transaction costs impede a Coasian (1960) contractual solution to the choice between price and expected damages. There are three basic kinds of liability rules. They differ in who is responsible for damages that it is not cost-effective to prevent and how much information the courts need to gather to make decisions. Under the negligence rule, injurers are liable for damages caused by their behavior only if they don’t exercise due care, and victims are responsible for other damages.11 Under strict liability with contributory negligence, the opposite is true; injurers are responsible for all damages unless the victims did not exercise due care. Under strict liability, injurers are responsible for all damages their products cause, period. The rules’ efficiency in managing damages from remote contingencies depends on whether both injurers and victims can alter the risks by varying their care and activity levels12 and whether victims purchased a product.13 Unilateral Accidents Accidents in which victims’ care levels do not affect the severity of damages are called unilateral accidents. In those accidents, strict liability creates incentives for an optimal level of damages. The costs 28

Managing Private Risks from Chemical Exposures of all accidents will be borne by firms, and, to reflect this cost, prices will rise until marginal benefits equal marginal costs. The negligence rule will not maximize welfare in unilateral accidents because it leaves consumers responsible for damages after a firm has exercised due care. That might leave consumer activity levels too high. For example, the operators of each airplane flight might take due care, but because accidents increase with the number of flights, the damages created by airplane accidents will exceed the optimum if airlines have no liability once they exercise due care and if passengers do not consider accidents when they decide to fly or select an airline. If airlines face strict liability, the prices they charge will reflect the costs of all accidents, and people will fly less. Bilateral Accidents Accidents in which care levels of both firms and customers affect damages are called bilateral accidents. Strict liability with contributory negligence will efficiently manage risks in bilateral accidents if customers are aware of the courts’ due-care standard. Under strict liability with contributory negligence, consumers must engage in precautions that the court determines are cost-effective. The damages that remain after that level of care is taken are the firm’s responsibility. This increases product prices and reduces purchases, an important method of accident control (Shavell 1987, 54). Accidents Involving Technologically Sophisticated Products Landes and Posner (1987, 287, 295–96) argue that strict liability is appropriate when information is asymmetrically available (e.g., firms have it and consumers do not) because the product is technologically sophisticated (e.g., synthetic organic chemicals). Efficiency is served by strict liability for two reasons. First, firms can discover innovations that reduce the damages from technologically sophisticated products at a lower cost than consumers because firms usually have better access to scientific knowledge. Second, risks that cannot be eliminated cost-effectively raise product prices, which reduces sales and reduces damages. In contrast, if technologically sophisticated products are subject to the negligence rule, several difficulties impede efficiency. First, courts must determine appropriate due-care levels for firms, a difficult matter in all situations but even harder when technical or engineering information is involved. Second, even if courts select an 29

CHEMICALS, CANCER, AND CHOICES efficient due-care standard, activity levels will be too high. Too many damages will occur in the aggregate because, although each item is optimally made, too many products will be sold (Shavell 1987, 55–58). Finally, firms have no incentive to offer safer products unless they can inform consumers and induce them to pay the marginal costs of the improvements, often a difficult task.14 A Critique of Liability Rules No Liability Might Be Better Despite the positive role liability rules theoretically can play in damage reduction15, some analysts prefer a no-liability system where producers and consumers make market choices about risk and victims are responsible for their own injuries. Under those circumstances, potential victims could purchase insurance rather than use liability rules to receive compensation. Proponents of no liability argue that the tort system consumes more resources per dollar of compensation than a simple insurance system (Huber 1988b).16 The relevant question, of course, is whether the tort system’s additional benefits (e.g., damages that are prevented) exceed its additional costs. Danzon (1988, 118) estimates that medical malpractice torts cost 40 percent more than simple first-party insurance. She argues that if approximately one injury of comparable severity is prevented for every injury compensated, then the tort system pays for itself. Priest (1988, 190–94), however, argues that the explosion in product liability litigation has not measurably deterred accidental or job-related death rates. But he recognizes that simple time-series bivariate analysis is rather crude evidence, because there is no counterfactual of how many accidents would have occurred if a noliability, first-party-insurance regime had existed. Liability Is Inefficient in Practice Some critics do not oppose liability rules in theory, but they argue that those rules, as implemented by real courts, firms, and consumers, do not yield an efficient level of risk. These criticisms can be grouped into five main categories. 1. Implementation differs so much from theory that torts inefficiently manage accidents and damages. 30

Managing Private Risks from Chemical Exposures 2. Judges and juries process information unpredictably, especially scientific information. Thus, tort outcomes create a large, perhaps nondiversifiable, risk for firms. 3. When damage causation is probabilistic, as in the case of the effects of synthetic substances on human health, torts inappropriately manage risk because it is difficult to link individual exposures with individual health outcomes. 4. Some firms reorganize to evade their liability obligations. 5. Courts award damages based on lost income rather than wage premiums for hazardous duties. Both Negligence and Strict Liability Have Been Inefficient Priest (1988, 202–6) compared product liability cases tried under the negligence rule with similar cases tried under strict liability. Using anecdotes, he argues that under the negligence rule in the 1950s and 1960s, firms were not made to take cost-effective precautions at all. Instead, the negligence regime essentially was a noliability regime. Under strict liability in the 1970s and 1980s, firms were held liable for all damages regardless of the victims’ lack of due care, even though many accidents were bilateral.17 Neither regime produced optimal risk management. Courts Utilize Information Poorly Courts and juries can use information poorly and inconsistently (Danzon 1988, 121). In cases concerning exposure to chemicals, juries are susceptible to emotional argument, even when good information on exposure and epidemiology is available, and this prevents torts from optimizing chemical damages. Brennan (1988) argues that matters become worse if the courts must process ‘‘scientific’’ issues, such as the inferences one should draw about human cancer from animal carcinogen studies, the appropriate size of a statistical confidence interval, or the relative concern one should give to false-positive and false-negative statistical errors in assessing the causes of human disease. Brennan proposes that a science panel adjudicate such disputes and that courts use the panel’s findings as input into legal proceedings. A closer examination of two prominent court cases suggests that the claim that courts are incapable of careful use of scientific evidence is overstated. Judge Jack Weinstein, in the Agent Orange litigation, was skeptical of animal studies and expert witnesses who espoused 31

CHEMICALS, CANCER, AND CHOICES views not supported by peer-reviewed research. His push for an out-of-court settlement was motivated by his belief that the lack of statistically significant findings of health effects in human epidemiological studies would force him to find for the defendants and leave the veterans with no money (Green 1992, 659–61, 676). The judge in the bendectin birth-defect decision accepted only peer-reviewed work and did not let the jury decide scientific disputes despite the decision in Ferebee v. Chevron (649 Fed. Supp. 801), in which a court of appeals ruled that battles of experts should be decided by juries rather than judges (Green 1992, 662–63). Green (1992, 699) concludes that courts are too careful about their use of scientific evidence. By dismissing animal studies and relying on scarce human evidence, courts make it very difficult for plaintiffs in chemical tort proceedings. Courts Are Lax About Cause and Effect in Chemical Torts Huber (1988a, 1988b) is concerned about the increasing tendency to award damages to those who allege that exposure to synthetic substances caused their problems, even though evidence to support their claims does not meet traditional scientific standards. Huber (1988a, 144–45) writes: With information about cause and effect both essential and unobtainable in almost equal measure, many courts have attempted to make a virtue of necessity: the brooding uncertainty about the risk becomes a lawsuit in itself. Plaintiffs have been injured, some courts have elliptically concluded, precisely because they fear, but cannot determine, that they have, in fact, been injured. Compensation is then awarded to pay for the costs they may incur in the future to find out whether they really have been hurt.

The best scientific evidence simply determines the average effect of chemical exposure on cancer incidence and how much that effect varies across individuals. The smaller the variance across individuals, the smaller the discrepancy between individual- and populationlevel understandings of causation. Chemicals, causation, cancer, and the courts also have a strained relationship because of the lag between exposure and disease manifestation. Again, the best scientific evidence links the variance in a population’s chemical exposure to variance in disease at a much 32

Managing Private Risks from Chemical Exposures later date. The relationship between cigarette use and lung cancer is widely recognized at the population level but exhibits great variance at the individual level. The fact that my wife’s uncle is still alive at age 84 after approximately 64 years of smoking, for instance, does not disprove the population-level relationship between cigarette smoking and lung cancer. Causation in individual cases is extremely costly (or impossible) to ascertain. Landes and Posner (1987, Chapter 9) and Robinson (1985) argue that courts should not waste resources determining whether substance x caused malignancy y in individual z. Instead, courts should compensate those who have been exposed to a carcinogen an amount equal to the expected value of damages based on the population’s disease probabilities. Such compensation would send the correct signals to both firms and consumers and conserve resources that are currently used in fruitless attempts to determine cause and effect at the individual level (National Research Council 1991, 43). Individuals could use the compensation to buy insurance and share the risk of later disease among themselves. Corporations Reorganize to Minimize Liability Some analysts believe that liability rules do not induce damage prevention if a firm’s net worth is less than the potential damages of its products (Shavell 1984). Landes and Posner (1984, 418) think this overstates the problem and suggest rational firms will compare their net worths to the costs of optimal damage prevention rather than total potential damages. Firms will invest in optimal damage prevention if the cost is less than their net worth because the alternative is to invest less than an optimal amount and risk losing their entire net worth. Wiggins and Ringleb (1990 and 1992) argue that both views mistakenly assume net worth is exogenous to liability rules. Corporations, for instance, might spin off hazardous activities into small firms with net worths much below their optimal damage prevention costs. Wiggins and Ringleb do not believe torts rectify the market’s inability to supply information about hazards; instead torts simply alter the structure of the industry. The authors argue that wage premiums to workers and, implicitly, price discounts to consumers are superior to ex post liability if the response to damages is aggressive industry reorganization and bankruptcy. 33

CHEMICALS, CANCER, AND CHOICES The heart of the problem is consumers’ lack of information about the relationship between a firm’s financial condition and the damages its products can cause. One solution might be to require firms to disclose the risks of their products, to explicitly compare those risks with a government recommendation about ‘‘acceptable’’ risk levels, and to inform consumers when the expected value of damages from their products exceeds their net worth. People are capable of deciding for themselves whether it is worth buying products from thinly capitalized firms from whom they might not recover tort damages. Schwartz (1985) also argues that imposing strict liability on products with ‘‘remote’’ risks (i.e., risks that make products more dangerous than cost-effective research would predict) causes inefficient endogenous firm behavior rather than efficient damage control. He believes firms should not be liable if they warn users about what they knew or should have known from optimal research. Otherwise, once damages materialize, firms will either liquidate their assets (even though their going-concern value exceeds their liquidation value) or undertake negative present-value projects with high early returns that redistribute earnings from future tort claimants to current shareholders (Schwartz 1985, 720–26). The behavior of JohnsManville since it has been overwhelmed by asbestos claims—paying high dividends and allegedly overcutting its timber—illustrates this argument. Damage Awards Are Based on Lost Income Torts induce efficient behavior in the presence of transaction costs only if they imitate the outcomes of contracts in the absence of transaction costs. If damage awards to victims are to substitute for the outcomes of an explicit risk-information market that does not exist because of transaction costs, then the damage awards must be based on data that reflect the willingness of people to accept known risks, such as wage premiums found in risky occupations. Instead, damage awards are usually based on an injured person’s actual lost income, a figure that is lower than the wages people demand to accept known risks (Dewees 1986). Flaws with Strict Liability Strict liability has some unique potential problems. It makes firms entirely responsible for developing knowledge, and it forms risksharing pools by product rather than by customer. 34

Managing Private Risks from Chemical Exposures Firms Are Responsible for Developing Knowledge As noted earlier, Landes and Posner18 (1987, 287, 295–96) argue that strict liability for technologically sophisticated products serves efficiency because it assigns the costs of acquiring knowledge to firms, which can develop information at a lower cost than consumers. Their argument, however, confuses efficiency with the question of who ought to pay for the commodity (i.e., who owns the property rights). Modern societies are quite specialized. Most of us are very productive at a few tasks and pay others who have different skills to perform many other tasks rather than do them ourselves. Specialization, however, does not imply that those with expertise must share it with others without compensation in the name of efficiency. Electric utilities, for example, generate power more cheaply than most consumers, but that does not mean that electric companies ought to bear the costs of generating power. Similarly, in free market economies, the question of who should pay for knowledge is completely separate from the question of who is the least-cost provider of that knowledge. The strict-liability rule assigns to firms the costs of residual risks that cannot be cost-effectively eliminated given current information.19 In turn, firms often have a strong incentive to find, act upon, and disseminate information that lowers their damage costs (or insurance rates), unless they can avoid their liability obligations as described earlier. Alternatively, firms could own the rights to knowledge, and consumers could pay them to develop and disseminate that knowledge so that consumers could purchase their own insurance against residual risks or pay firms to use their knowledge to reduce their product risks. Both scenarios could easily result in the same aggregate level of damages, as Coase (1960) would argue. I do not believe Landes and Posner can claim that assigning knowledge property rights to citizens is efficiently superior to assigning those rights to firms.20 Formation of Insurance Classes by Product Although strict liability appears to serve efficiency because product prices rise to reflect firms’ responsibility for the aggregate level of damages, efficiency is realized only if consumers do not vary in their care or activity levels (or care and lower activity levels do not 35

CHEMICALS, CANCER, AND CHOICES affect damages) (Danzon 1985; Epstein 1985; Priest 1987; Calfee and Winston 1988, 24). Strict liability forms insurance classes by product type, while no-liability or negligence regimes form insurance classes by the risk of the person using the product (Calfee and Winston 1988, 24). If risks vary less across products than across individuals, then the provision of insurance through product prices is inefficient because careless people and those with high activity levels increase product prices for those who reduce damages through less hazardous care and lower activity levels.21 Liability Rules for Chemicals Evaluating torts as a response to transaction costs in the case of chemicals involves two tasks: comparing the characteristics of chemicals with each liability rule’s requirements and weighing the trade-offs that apply to liability rules in general. Strict liability is efficient only when firms can do a great deal to reduce their product risks and consumers cannot. The negligence rule becomes more appropriate as consumer behavior increasingly affects damages, firm behavior decreasingly affects damages, and knowledge about products becomes more widespread. How do the facts about chemicals relate to such institutional demands? Strict liability pools risks by product; negligence pools risks by customers. In the case of chemicals, the inefficiencies created by product-specific rather than customer-based insurance vary from product to product. Whereas cancer risks from drinking chlorinated water probably do not vary among users even when care levels differ, cancer risks to infants whose parents spray insecticides on tomato plants probably differ greatly depending on whether the infants are upwind or downwind of the spraying. A severe problem with using torts to manage damages created by chemical use is the contrast between the court’s concern for establishing causation at the individual level and the scientific evidence that establishes causation at the population level. When population exposure effects are known, the incompatibility between torts and population-level causation data can be resolved by awarding expected-value damages, as suggested by Landes and Posner. But that solution has two problems. First, the number of substances for which there are reliable data on human health effects is small. Second, courts have not adopted the expected-value approach to damages. 36

Managing Private Risks from Chemical Exposures Some claim the problems between courts and the science of chemicals run much deeper. Case-law anecdotes exist to support both sides of the debate. But even if courts are scientifically inept, they are not alone in their failure. Feinstein (1988) argues that many epidemiologists are not careful to differentiate random statistical relationships from causal ones. Selecting Among Inefficiencies Is a Value Choice The bottom line is that no single liability rule efficiently manages the risks created by all chemicals in all situations. Instead, tradeoffs exist whose appropriate resolution varies across cases. Strict liability emphasizes the prevention of harms created by product use and is insensitive to consumers’ care levels. The negligence rule burdens firms less but allows consumers to have inefficient care and activity levels. In addition, firms might reorganize to evade even their minimal responsibility for due care. Strict liability with contributory negligence forces courts and juries to determine appropriate care levels, a process in which grave errors can be made. Finally, a no-liability regime will have no negative effects on firms, but customers may face high transaction and information costs and the level of damages in society could be greater than optimal. The inefficiencies created by strict liability will be small for those products whose consumers do not vary much in their care or activity levels, whose damages are not much affected by care or activity levels, whose damages are foreseeable by firms, and whose producers do not reorganize as a response to liability. Products with the opposite characteristics will cause large inefficiencies. So the optimality of liability rules is largely empirical and product specific rather than theoretical. Landes and Posner (1987, 291–307) argue that the use of the rules in modern product liability law has in general been allowed to vary to promote efficiency. But to the extent that liability rules cannot be tailored to the characteristics of particular products, the choice between inefficiencies depends on one’s values about which errors are most costly, and individuals will vary in their assessment of these trade-offs (Rothbard 1982, 70). No scientifically correct answer governs these trade-offs. One Possible ‘‘Correct’’ Answer Weitzman (1974), Spence and Weitzman (1978), and Crandall (1983, 61–68) offer a scheme to compare the trade-off between the 37

CHEMICALS, CANCER, AND CHOICES

Dollars per Quantity of Pollution Removed

Figure 3 POLLUTION ABATEMENT WITH NO THRESHOLD HEALTH EFFECTS MC1 Marginal cost MC2

Zero pollution 1 4

P*

3

MC1

Marginal benefits

2

MC2 Q1 QL

QS

QU Q2

Q0

Pollution Removed

SOURCE: Crandall 1983, 62.

inefficiencies created by command-and-control regulation of pollution through emission quantity standards and those created by a pollution emissions fee that is inefficiently set (i.e., set at a level that does not equal the marginal benefits of emissions reduction). They argue that if the curve for the marginal costs of pollution reduction slopes sharply upward as emissions reduction increases22, the key factor in the analysis is the shape of the marginal-benefits curve. Figures 3 and 4 graphically display the marginal costs and benefits of pollution reduction in the face of uncertain abatement costs. In Figure 3, the marginal-benefits curve is relatively flat. That is, the marginal benefits of initial pollution reduction are very similar to the marginal benefits of additional pollution reduction. Such a marginalbenefits curve would be associated with exposure to common air pollutants like sulphur and nitrogen oxides. In Figure 4, the marginal-benefits curve initially is sharply downward sloping. That is, the marginal benefits of initial pollution reduction are quite large but decrease rapidly with additional pollution reduction. Such a marginal-benefits curve would be associated with exposure to a substance that has a ‘‘threshold’’ for health effects with large benefits 38

Managing Private Risks from Chemical Exposures

Dollars per Quantity of Pollution Removed

Figure 4 POLLUTION ABATEMENT WITH THRESHOLD HEALTH EFFECTS

MC1 Marginal cost MC2

1

4

Zero pollution

P*

3

MC1

Marginal benefits

2

MC2 Q1

QS

Q2

Q0

Pollution Removed

SOURCE: Crandall 1983, 62.

for reduction up to QS but few additional benefits for reduction beyond Q2. Optimal pollution abatement exists when marginal benefits and costs are equal, which is the point described by price P* and quantity QS. The dotted lines MC1 and MC2 in both figures describe costs of abatement that are higher (MC1) and lower (MC2) than expected. In a perfect world, regulators could set a pollution fee at P* or a quantity standard at QS and achieve optimal pollution abatement. In the real world, uncertainty about costs and benefits exists. The areas of the triangles labeled 1 through 4 in Figures 3 and 4 are proportional to the resources that are wasted if abatement costs are higher or lower than expected. Triangles 1 and 2 represent the waste created by an incorrect quantity standard, and triangles 3 and 4 represent the waste created by an incorrect pollution fee. The waste from an incorrect quantity standard always exceeds the waste from an incorrect fee if the marginal-benefits curve is flat, as shown in Figure 4. The opposite is true if the marginal-benefits curve is initially steep, as shown in Figure 3. 39

CHEMICALS, CANCER, AND CHOICES The conclusion is that fees leave quantities uncertain while quantity standards leave costs uncertain. If the additional benefits of getting the quantity correct are low, use fees. If the additional benefits of getting the quantity correct are large (e.g., in the case of nerve gas emissions), use quantity standards. Unfortunately, suggestions about how to balance the inefficiencies of standards and fees are applicable only if marginal-benefits curves are shaped similarly for all individuals. If people have marginalbenefits curves of differing shape (and I certainly believe they do), then we are not faced with an efficiency decision but rather with a political or equity choice about whether we should extinguish the rights of some to advantage others. The answers to such questions cannot be ‘‘scientifically’’ correct. Essential Value Choice Is About Personal Responsibility The choice between liabilities also involves value choices about individual responsibility. Advocating no liability or the negligence rule is consistent with the belief that people individually should be responsible for thinking about their choices and risks and whether to insure against them. Advocating strict liability is consistent with different beliefs. Summary of Liability Rules for Chemicals The efficient resolution of chemical harms clearly requires information about exposure levels and their health consequences, but the assignment of costs for acquiring this information is less a matter of efficiency than proponents of strict liability maintain. Even if one believes it would not be efficient for individuals to be responsible for the risks involved in the thousands of choices they make and that firms are the least-cost providers of knowledge about damage prevention, the issue of whether people should pay firms or other agents to think about risk is a value choice about property rights ownership. Strict liability is analogous to a mandated benefit that forces all consumers to buy insurance and knowledge development with the products they buy. Like other mandated benefits, some of the real costs probably falls on consumers as well as workers and shareholders. Additionally, strict liability gives firms, rather than individuals, the power to decide what risks are acceptable. A negligence regime 40

Managing Private Risks from Chemical Exposures lets consumers decide which risks to accept, but it depends on wellfunctioning first-party insurance markets to efficiently share the remaining risks. Under a no-liability regime, firms would distinguish their products by safety and price. But this seems implausibly freewheeling, for toothpaste firms could sell poisonous products. But why would they want to? And why would consumers buy poison when other toothpaste firms could sell products certified by scientific laboratories? If the value consumers place on information matched the cost to firms to develop and disseminate that information, firms would compete to provide it. A negligence regime does not differ greatly from no liability. The main difference involves safety features and information that consumers are not willing to purchase but are cost effective to provide. Under a no-liability regime, for example, a company might try to sell mothballs that did not include p-dichlorobenzene, a suspected carcinogen, and charge more for reducing health risks. But consumers might not buy the product because of its extra cost. Under a negligence regime, though, courts might hold firms liable for not switching their formulation. If no-liability is politically infeasible, I believe a negligence tort regime is the next best choice. Command-and-Control Regulation The tort system expends resources only after damage (or exposure, in the case of chemicals) occurs, thereby saving resources that would have been devoted to gathering information about damage contingencies that never occur. Bureaucratic regulation gathers information ex ante, which legislatures then use to set appropriate standards.23 The literature on regulation is very extensive. New Deal activism in the areas of monopoly and antitrust and the explosion of health, safety, and environmental regulations during the 1965–1975 period led to increased scrutiny by academics and policy research organizations. I do not review this literature here because many competent reviews already exist.24 Instead, I examine only the role that command-and-control bureaucracies can play in the acquisition of information, the use of that information to set conduct standards, and the alleged superiority of bureaucracies (relative to courts or markets) in doing both. 41

CHEMICALS, CANCER, AND CHOICES Information Acquisition Let us first examine the virtues of information acquisition by bureaucracies.25 Information acquisition includes two separate activities: the development of basic knowledge and its dissemination. Traditionally, even most market-oriented economists have argued that the development of basic knowledge has public-good characteristics and, thus, will not be provided optimally by private firms. Two examples of basic research discussed earlier in this book are knowledge about the effects of radon exposure on human health and the database of animal tests that Ames and his colleagues constructed. In this section, I do not examine the necessity and effects of publicsector involvement in the development or dissemination of basic knowledge. Those issues are discussed in a later chapter.26 This section focuses on the ex ante versus ex post information-gathering differences between regulation and torts. Allegedly, the tort system differs significantly from regulatory and no-liability regimes in the development and consideration of information. The tort regime examines knowledge after damages have occurred in order to reconstruct how informed firms and consumers would have acted; regulatory and no-liability regimes examine information before decisions are made in order to prevent damages.27 For example, I work in a six-story office building. When I accepted my job, I could have inquired about the techniques used to construct the building, any cost-cutting shortcuts that were taken, and whether the engineers assumed a wind speed of 95 or 120 miles per hour in their hurricane simulations. Or I can wait until a possible catastrophe occurs—the building collapses—and ask these questions during a liability inquiry. Ex post examination of information is more efficient than an ex ante provision if the net benefits of the former are greater. At first glance, the tort system’s ex post examination seems to have greater net benefits because the expense of informing people when damages do not occur is avoided, although savings in chemical cases are less than they appear because the problem of disease latency makes it necessary to inform all people who are exposed and not only those who become ill. But the expense of knowledge primarily lies in its development rather than its dissemination. Knowledge about the design and construction of buildings exists but is rarely communicated to those 42

Managing Private Risks from Chemical Exposures outside the construction process. But it could be done in a fashion analogous to that used in providing information about prescription drugs. Drug samples given out by physicians are accompanied by circulars with test information that, by law, is supplied in a standard format. The expensive part of the process is the research, not drafting and printing the circulars. And because liability inquiries require the same basic research to render judgments about due care, the savings generated by ex post examination are only a small portion of the total costs of knowledge. Using Information to Regulate Behavior Governments conduct basic epidemiological research (e.g., the National Institutes of Health) and subsidize similar research in universities. Bureaucracies often use that information to limit the public’s exposure to various chemicals. Should individuals have the right to ignore an agency’s recommendations if the exposure or risk is a private good?28 I think the answer is yes, and sometimes the government agrees. In some cases, it provides information but does not regulate behavior. As of May 1, 1994, for instance, the composition of all processed food sold in the United States was expressed as a percentage of a government-recommended diet. No one, however, argues that the state should ban foods that do not comply with the recommended diet. At other times, the public criticizes government attempts to go beyond the simple provision of information. The National Highway Traffic Safety Administration tried to recall certain General Motors trucks whose gas tanks explode more easily in side-impact collisions, rather than just informing consumers of the facts. The political controversy was so great that the agency retreated (Bennet 1994).29 The slow approval of AIDS drugs and the ban on saccharin have also provoked opposition. Of course, an agency sometimes gets into political trouble because it provides only information and does not regulate behavior. For example, some critize the Federal Aviation Administration (FAA) for not banning planes with histories of icing problems. But instead of banning the planes, perhaps the FAA could do a better job of disseminating information about the problem, such as requiring 43

CHEMICALS, CANCER, AND CHOICES icing warning labels on tickets for certain planes. Distributing information ameliorates the market failure (if any exists) if the damages are a private good.30 Are Building Codes a Counterexample? Proponents of regulation might offer the example of building codes in support of experts’ gathering information and setting standards. What plumbing, electrical, and structural characteristics should buildings possess? The traditional answer is that experts should write building codes for local governments to adopt. That ‘‘protects’’ consumers from unscrupulous builders and relieves consumers of the ‘‘cognitive overload’’ that would result from having to consider so many construction decisions. Unlike the political controversy that would accompany a ban on ‘‘unacceptable diets,’’ a ban on ‘‘unacceptable houses’’ generates little public opposition. How could anyone argue that building codes are not an example of ‘‘good’’ command-and-control regulation of private-good risks? I will construct such an argument, which has both efficiency and equity components. The efficiency portion asks whether information markets and torts could achieve similar results at lower costs. The equity portion asks why regulations are used instead of contracts to force costs on some for the benefit of others. First, consider efficiency. Many people incorrectly assume that, in the absence of codes, consumers would be helpless against greedy firms. But without codes, builders would compete on the basis of safety and features, and consumers could hire inspectors to evaluate structural quality (which already happens during mortgage inspections). Builders could also hire firms to certify that their structures comply with best practice (the construction equivalent of Underwriters Laboratories). Uncertified builders would be at a quality disadvantage. Now consider equity. For purposes of discussion, assume information markets work well and the difference between a world with codes as suggestions and codes as command-and-control devices is the possibility that someone might knowingly live in a structure that is not in compliance with building codes. Why would someone choose to do that? Some might do so because their income is low and they opt for cheaper homes. Who are we to say they should not? Others might 44

Managing Private Risks from Chemical Exposures do so because ‘‘one size does not fit all.’’ A childless family might find lead paint on the walls worth the price discount. If we are really troubled by substandard houses, we could pay people in those homes to change their behavior, resolving the conflict through contract rather than fiat, as Coase (1960) suggested. Now assume that information markets work well but most people do not do their homework or hire agents to assist them. Should regulations prevent people from making mistakes like buying houses that fall apart? Again, my answer is no for equity and efficiency reasons. If people are disturbed by the possibility of such results for themselves or others, they can pay extra to write contractual guarantees against such adverse outcomes. Although banning their possibility through regulation appears to be ‘‘free,’’ the cost of mandated benefits is borne by consumers if their price sensitivity is low. If their sensitivity is high, then the cost of mandated benefits reduces product sales. In addition, trade restrictions enacted with the noble intention of preventing people from making mistakes also reduce useful innovation. For example, building codes impede attempts to construct nontraditional, low-cost housing. San Diego, like most jurisdictions, prohibited shared bathrooms and eating facilities in apartment buildings. In an experiment, the city waived those requirements, and single room occupancy (SRO) hotels were built that rent for $200–$300 per month rather than the $500 charged for a traditional apartment (Reinhold 1988). The experiment was so successful that downtown businesses and residents complained that the hotels attracted too many undesirable people, and the city had to reverse course (DeParle 1993).31 Supporters of regulation might argue that regulations are primarily equity tools rather than efficiency mechanisms—building codes, for example, ensure quality housing for low-income families. Of course, they do no such thing. Poor people live in shoddy homes because they have little money. Building codes do not give the poor any additional funds with which to purchase better homes. In fact, codes restrict the supply of housing, which raises prices, making the poor worse off than they would be without codes, as the San Diego SRO experiment demonstrated. Regulating private goods by command-and-control creates efficiency losses with no compensating equity gains.32 45

CHEMICALS, CANCER, AND CHOICES Conclusion Many chemical exposures are private goods. Essential prerequisites for optimal exposure choices include the development and dissemination of information about the effects of exposure on human health. Under a no-liability regime, information would be acquired by firms attempting to inform consumers and by consumers educating themselves. Under negligence, strict liability with contributory negligence, and strict liability, firms and consumers would have different obligations to prevent damages. Those obligations, however, would be examined only when damages occurred and lawsuits were filed. Governments assist in the acquisition of information by funding and conducting basic research. Under command-and-control regulation, however, government agencies also use information to set behavior standards. Although torts seem to save resources because courts investigate only when damages occur. These savings are not as great as they appear because the expense of information is largely in its development, not its dissemination. The best mix of liability rules, information markets, and regulations varies across commodities even if efficiency is the only criterion. Because all are suboptimal in practice, the proper mix also depends on people’s inefficiency preferences. Asserting that one values individual liberty eliminates only command-and-control regulation from the set of possibilities. Under the right circumstances, no liability, the negligence rule, strict liability, and strict liability with contributory negligence all promote individual liberty. On balance, I favor no liability or the negligence rule because I believe the adverse side effects of strict liability are too severe.

46

4. Managing Public Risks from Chemical Exposures Chemical exposures are not always private.1 But the ingredients for optimal private exposure also pertain to public exposure: basic knowledge about the effects of exposure on health, dissemination of that knowledge, the transaction costs of becoming informed about numerous exposure risks, equity considerations, and struggles between emitters and emittees. This chapter does not repeat the discussions of Chapter 3 but discusses the additional considerations relevant to managing public exposures. The main difference between public and private chemical exposures is that the level of public exposures must be equal for all those in the same airshed or watershed.2 That, of course, eliminates the primary method of reducing conflict associated with private goods: individual differences in consumption. Although people consume identical amounts of air and water pollution, individuals could differ in their contributions to the collective outcome if an emissions-rights market existed. On the other hand, bureaucratic regulations could attempt to duplicate the results of an emissions market. Finally, class-action torts could serve as either a substitute or a supplement. An Emissions Market Public chemical exposures, by definition, cause everyone to ‘‘consume’’ the same ambient exposure. What should that exposure level be? Because the harms from chemical exposure are collectively consumed, the efficient level is that which equates the sum of the marginal harms among those exposed with the marginal benefits of firms that emit (Samuelson 1954). Emissions reductions should occur until the abatement costs equal the sum of the amounts that exposed people would pay to avoid (or be willing to accept in compensation for exposure to) a similar known risk in a market setting (Viscusi 1989a; Broome 1978). 47

CHEMICALS, CANCER, AND CHOICES What institutions could achieve such a pollution level? One possibility is that the government could create emissions property rights, as it did with the electromagnetic spectrum. As long as initial rights to emit chemicals into the air and water were created and allocated to some owners, the resulting market would be efficient (Coase 1960). If too many emissions resulted from the initial allocation of emissions rights, people could buy ‘‘excessive’’ emissions rights from emitters. If too few emissions rights existed, emitters could buy existing rights or pay people to accept more.3 The collective outcome would be determined by the interplay of people’s preferences for exposure, their budgets, and the market price of emissions rights. The beauty of emissions rights is that they are neither pro-environmental nor anti-environmental. They are transparent and neutral. If Congress decided ambient exposure must be reduced, it could raise money through taxes, purchase emissions rights, and bank them. If companies wanted to increase ambient exposure, they could pay citizens to accept increased exposure. Either action should cause us to think about pollution’s costs and benefits more than we do today. The main difficulty with both the too-many and too-few emissions-rights scenarios, however, is the collective nature of the benefits. Let us first examine the too-many scenario. If the Sierra Club purchased rights from firms to reduce ambient exposure, it could not restrict any resulting benefits to its members. To illustrate the difficulties of private markets in handling the problem of spillover benefits, imagine an entrepreneur who tries to make a living by buying emissions rights from emitters and improving ambient air quality. If that entrepreneur attempted to cover his costs and even make some money for his environmental enhancement efforts, how would he restrict consumption of his ‘‘product’’ to those who paid him? The short answer is that he could not easily do so. The too-few scenario is analogous. If Congress created new emissions rights, all emitters would benefit from the lower prices that would result from the increased supply.4 But those benefits could not be confined to those firms that paid the lobbying costs. Private action will not optimally supply either the purchase of emissions rights or the creation of more emissions rights because it is difficult to restrict the benefits to those who pay—a fundamental 48

Managing Public Risks from Chemical Exposures requirement for an efficient market system. The amount of emissions-rights reduction and creation supplied by private means, however, will be greater than zero. Individuals can pool resources to purchase emissions rights or lobby Congress to create more. Groups like the Nature Conservancy, for example, solicit contributions and purchase tracts of land they consider appropriate for preservation. But the amount they collect is probably suboptimal because people who value preservation do not have to give money to the group to enjoy the resulting benefits. The same would be true for any group that purchased emissions rights or lobbied to create more rights. Solutions to the Free-Rider Problem What should be done about the ‘‘free-rider’’ problem? One possibility is to determine the true demand of individuals for emissions reduction (or creation) and assess them charges that reflect their true demands. This ideal charge would be each individual’s marginal benefits from emissions reduction (or creation). Coercion would be necessary to collect the charge, but the taxes would not be like existing taxes because the coercion would be used only to prevent individuals from failing to pay for their marginal benefits. Because people would differ in their evaluations of the benefits of risk reduction, individuals’ taxes for environmental quality would differ. Determining the demand for such public goods is so difficult that economists have coined the phrase ‘‘demand revelation’’ to describe the problem (Mueller 1989, 124–43). Some solutions have been offered, but they remain academic curiosities and are not used in real-world free-rider situations. A second possibility would be to accept the inefficient libertarian ‘‘solution’’ of forming groups like the Nature Conservancy. But the lack of efficiency implies that the struggle over initial propertyrights ownership would be enormous because the initial creation of property rights would determine the characteristics of the resulting trades. If firms gained the right to pollute and citizens had to buy firms’ rights to do so, the free-rider problem would result in too little purchase of rights by environmental groups and too much pollution relative to the efficient level. If citizens had the right to a pristine environment and firms had to purchase pollution rights or compensate citizens for the creation of additional rights, some firms 49

CHEMICALS, CANCER, AND CHOICES would free ride on the efforts of others, and too little pollution relative to the efficient level would occur.5 A third possibility is to raise revenues to purchase emissions rights through the legislative process. Some might see that as no different than the status quo policy of appropriating money for the EPA for environmental protection, but emissions-rights purchases would make the relationship between costs and benefits more transparent and incremental. Congress would debate whether an extra $50 million to buy so many pounds of emissions rights was worth the reduction in ambient exposure. In such a debate, the costs of reduced pollution would not be hidden as they are now. Under current policy, standards are changed as if the resulting benefits were free. Bureaucratic Regulation of Public Exposure Many academics favor emissions markets, but those markets play a small role in actual policy. Instead, governments manage pollution primarily with command-and-control standards for ambient chemical levels and emissions. In theory, regulations can produce any given amount of emissions reduction at least cost, an outcome that resembles that of an emissions market. In well-functioning markets, people maximize net benefits subject to a budget constraint. In the context of reducing pollution, that implies we should spend a given amount of money in ways that maximize our collective life expectancy. Some scholars, like Gillette and Krier (1990) and Hornstein (1992), argue that scientific risk analysis fails to recognize important distributional issues.6 Under some circumstances, for example, it is better to save 2 lives (at a cost of $25 million each) than 1,000 lives (at a cost of $50,000 each). These scholars also suggest that the Coase (1960) theorem fails in pollution control situations. That is, they argue that the decision whether to save 1,000 lives or 2 lives would depend on who received initial property rights. A classic case in which the theorem does apply involves cellular phones. The FCC held a lottery to initially allocate property rights to the portion of the electromagnetic spectrum that analog cellular phones use. The lottery winners quickly sold their rights to telecommunication companies. The initial lottery affected the distribution of wealth (i.e., lottery winners received a windfall) but did not change the ultimate ownership of rights (i.e., 50

Managing Public Risks from Chemical Exposures rights were purchased by the phone companies that could use them most effectively). Unlike cellular phones, however, health issues often lead to emotional discussions. And many people consider weighing health costs and benefits to be in poor taste. In such a cultural milieu, the Coase theorem could be violated. People’s willingness to buy health-related rights can differ greatly from their willingness to sell the same rights. If citizens were given emissions rights, some might demand much more to sell those rights to emitters than they would pay the same emitters to purchase the rights (if those rights had initially been given to the emitters). Would initial exposure or emissions property rights determine resulting trade patterns? No one knows the answer, particularly since we have so little experience in trading those types of rights. I believe that most people are more rational than the critics believe, even in health matters. Suppose Congress replaced pollution controls with an emissions market. Assume that the costs of restricting differing emissions vary. Also assume that the likely benefits of emissions restrictions (lives saved) vary. For discussion purposes, following the earlier example, assume that one emissions restriction costs $25 million per expected life saved whereas another emissions restriction costs only $50,000 per life saved. The argument offered by Gillette and Krier (1990) and Hornstein (1992) is that, if Congress allotted emissions certificates to adults to protect them against emissions that are expensive to restrict (the $25 million emissions), individuals would not sell their certificates to firms and use some of the proceeds to protect themselves against the emissions that are cheaper to restrict (the $50,000 emissions) and use the remainder for other consumption. A few individuals might not sell their certificates, but I think most would. They know that the additional pollution would reduce the number of days they could expect to live. But they also know that they value the extra consumption; they would not spend the valuable property right entirely on health and safety. A charitable interpretation of the concerns raised by Gillette, Krier, Hornstein, and others is that, under special circumstances, initial distribution determines the pattern of the resulting trades. I think their concerns are invalid, but both Coase-supporting and Coaserefuting scenarios are conjecture rather than scientific experiments. 51

CHEMICALS, CANCER, AND CHOICES To conclude, the bureaucratic regulation of pollution has the possibility of creating a result similar to the pollution levels provided by an emissions market if the bureaucracy maximizes expected years of life saved for a given cost. However, if health-related issues evoke an emotional response not evoked by cellular phone rights, the concept of efficient aggregate risk reduction itself becomes problematic because it could be determined by the ownership of initial property rights. Real EPA Regulation Differs from Theory Regulation could duplicate emissions-market results, but most scholars doubt that it does so in practice. Command-and-control regulation, as practiced by the EPA, does not remotely resemble the maximization of expected years of life saved. Instead, two characteristics prevent regulation from easily imitating market results (Crandall 1983). First, the use of emissions standards, which establish a level of emissions into the air and water above which emitters are fined, implies that emissions below the standard are ‘‘free’’ to the emitter. An explicit market could achieve the same distributional result but only by explicitly giving away initial rights, an activity thought to be politically difficult to implement.7 Second, regulations do not allow emissions reduction to vary across emitters. Instead, all emissions must be reduced by some fixed percentage or to a specified level. To achieve a given reduction in ambient exposure at lowest cost, however, requires that those emissions that are cheapest to reduce be cut back first. That would occur naturally in an emissions-rights market but not under command-and-control regulations that mandate specific reductions for each emitter. The Behavior of Regulatory Agencies: Empirical Evidence The regulation of both arsenic by the EPA and acrylonitrile by OSHA is estimated to have cost over $100 million per life saved. The massive irrationality suggested by those two examples is reduced, however, when more cases are analyzed. Empirical analyses of bureaucratic decisions on exposure suggest that regulators weigh costs and benefits even though they are forbidden to do so under current law. 52

Managing Public Risks from Chemical Exposures How do bureaucracies regulate public exposures in practice, given that they are legally forbidden to maximize years of life saved subject to a budget constraint? Travis and his colleagues (1987) reviewed 132 regulatory decisions concerning chemical exposures.8 In general, cancer risks are regulated if individual risks are greater than 1 in 500 or population risks for the entire United States are greater than 100 cancers per year. In addition, regulation seems to occur only if the cost per life saved is less than $5 million or any individual risk is greater than 0.5 percent.9 Pease (1992) surveyed all regulatory actions taken with regard to known carcinogens. He argues that agencies rarely regulate any substance that produces an individual risk of less than 1 in 1,000,000 (roughly 3 cancer cases per year nationwide) and regulate almost all substances that create risks of greater than 1 in 1,000 (roughly 3,000 cancer cases per year nationwide). He also describes the agencies as much more flexible and realistic in their regulatory behavior than many critics charge. Cropper et al. (1992) examined the effects of costs and benefits on EPA decisions, between 1975 and 1989, to suspend the use of pesticides that have been shown to cause cancer in animals. They conclude that the agency does indeed weigh benefits against costs10 (suspending use only if risks are high and benefits are low) and estimate the cost per cancer case avoided by these pesticide regulations is $35 million, a sum that seems well above the implicit value of approximately $5 million to $6 million that workers place on known death risks (Viscusi 1989a, 81). Although the $35 million figure is high, it is not necessarily nonoptimal just because it differs from the estimate of the market price for privately consumed risk. Remember that Viscusi’s estimate of $5 million is the amount that firms must pay to induce the marginal worker to accept known occupational risks and the amount firms are willing to pay because the worker’s marginal product is equal to or greater than that amount. The people who accept such wages are not a random sample of the population; they generally are less risk averse and have fewer employment options. To induce a larger population of people to voluntarily accept the same level of risk clearly would require more money per person. Unlike the continuous nature of emissions markets, commandand-control regulation has a dichotomous legal orientation. Exposure below the standard is okay, but exposure above the standard 53

CHEMICALS, CANCER, AND CHOICES is illegal. In reality, the health effects of most chemical exposures are probably continuous. Henderson (1996) illustrates the perils of the legal orientation in his study of the effects of ambient ozone-level standards on the behavior of polluting firms. The regulations that govern ambient ozone levels prohibit any hourly exposure from exceeding 0.12 parts per million (ppm). This bright line dividing compliance from noncompliance results in some perverse but predictable behavior by firms and local governments. The standard induces them to worry about rare but high exposures rather than more typical exposures. The mean and median of hourly average ozone exposures have increased since 1977 while extreme exposures have decreased (Henderson 1996, 790–92). Localities have complied with the regulations, but the results probably do not improve public health at least cost. Public Goods and Torts: Theory What role can torts play when damages are collectively consumed? Simple torts are prone to the same free-rider problems that groups face when purchasing emissions rights. If a neighbor successfully sues a company to reduce its emissions, all those who consume the air or water will benefit regardless of whether they contributed to the lawsuit costs. Class-action suits partially remedy the free-rider problem by allowing one suit to represent the diffuse interests of all the beneficiaries.11 For class-action suits to resolve exposure torts efficiently, the cost to firms of compensating pollution victims should equal the sum of the damages suffered by the victims (or their willingness to pay to avoid such damages). Because the willingness to pay to avoid damages will vary widely among individuals, the simple divide-up-thepie-equally resolution of a class-action tort is not likely to be efficient (Gillette and Krier 1990; Hornstein 1992). In addition, the usefulness of class-action torts declines as the number of defendants grows.12 Public Goods and Torts: Empirical Evidence How efficiently do liability institutions protect us from carcinogens? How accurate are critics who use anecdotes to argue that strict liability has pernicious effects on the willingness of chemical and pharmaceutical companies to take risks? 54

Managing Public Risks from Chemical Exposures The nature of tort litigation precludes systematic empirical investigation of the effect of legal rules on behavior. Not all accidents result in litigation. In addition, not all litigation actually stems from accidents; some cases stem from nonaccidents (i.e., fraud). Finally, not all litigation results in a court decision. Most cases are settled out of court. Priest and Klein (1984, 2) and Viscusi (1986) report that only about 5 percent of civil disputes ever reach trial; the rest are resolved through out-of-court settlement. If the legal disputes and trial cases were randomly chosen, inferences about the optimality of the litigation system could be made from trial resolution data. But, since people choose whether to litigate and litigants choose whether to go to trial, the cases that reach trial are not a random sample of disputes (Wittman 1985, 185, 212). As a result, studies of court decisions suffer from selection bias. We cannot infer from court decisions whether the underlying legal rules favor the defendant or the plaintiff because legal rules affect the selection of disputes from the universe of accidents (and nonaccidents) as well as the outcome (Eisenberg 1990). That, in itself, would not be a problem if there were data about people’s decisions to litigate and settle; but, for the most part, trials are the only window on the liability system.13 Realizing that the decisions of accident victims to litigate and of litigants to settle are not random yields several insights. First, few litigated cases involve facts that lie far from the decision standards that courts use to render judgments. Plaintiffs and defendants make errors about the relationship between the facts of their particular cases and the rules used by courts to separate successful from unsuccessful torts, but large errors are uncommon (Priest and Klein 1984; Priest 1985, 220). Second, high-stakes cases are more likely to be litigated (Priest 1985, 220). When facts are far from the standard decision rules, cases usually are not worth litigating unless the potential benefits are enormous. And because courts do err, there will be some bizarre decisions involving large amounts of money. Third, changes to the liability system that increase the expected value of damage awards will also increase the number of claims that arise from those who have suffered no damages (i.e., the fraudulent) (Hughes and Snyder 1989). The shift from a negligence regime to strict liability has increased the expected value of awards. That has 55

CHEMICALS, CANCER, AND CHOICES increased the number of litigated cases, some percentage of which invariably are fraudulent. The outrageous anecdotes cited by Huber and others as evidence of the dangers of a runaway strict-liability system should be evaluated in the context of the second and third insights. One should not and cannot infer from such cases much about the overall optimality of the liability system. ‘‘Simply put, the relationship between claim frequency and the number of injuries is too complex for reliable assessment of the deterrent effects of reforms’’ (Hughes and Snyder 1989, 426). Conclusion The essential difficulty in efficiently managing public exposure to carcinogens is summing the marginal benefits across individuals. Emissions rights can be created and auctioned just like rights to portions of the electromagnetic spectrum, but we will not know whether the ambient exposures that result are efficient. Efforts by groups to reduce or increase exposure will be characterized by freerider problems. Despite that flaw, emissions rights allow trade gains between those who own them but do not value them and those who value them but do not own them. Under the current regulatory regime, the fulfillment of both these preferences is needlessly centralized and politicized. Even if the contraction or expansion of emissions rights is performed through the use of taxes rather than the voluntary fundraising efforts of groups, the country will benefit from a more transparent relationship between the costs and benefits. Despite the obvious benefits of emissions markets, command-andcontrol regulation is the primary means used to limit public chemical exposures. In theory, regulation can produce efficient pollution levels if the bureaucracy minimizes the cost of expected years of life saved when it issues regulations. In practice, however, the manner in which regulation commits resources to emissions control saves few years of life at great expense while ignoring opportunities to save more years at less expense. In addition, regulation produces inefficient outcomes because of its legal compliance versus noncompliance orientation rather than the more flexible, continuous orientation of market adjustment. 56

Managing Public Risks from Chemical Exposures To be fair, bureaucracies exhibit some rationality. The probability of exposure control is reduced as the cost per life saved rises. But the costs of many exposure limitations are much greater than the implicit market price for health risks as inferred from wage data in dangerous occupations. Because the costs of these extreme regulations are not paid by those who value exposure reduction the most, existing pollution controls are almost certainly inefficient. Class-action torts can play a role in limiting public exposures when the number of plaintiffs is large and the number of defendants is small. As with the other remedies, the major limitation of torts is the inability of courts to determine the sum of the marginal benefits from pollution reduction. Empirical evaluation of the determinants of tort outcomes is extremely difficult because several nonrandom human decisions lie between damages from exposure and a court decision. Inferences about the optimality of the liability system are not easily drawn from trial resolution data.

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5. Insurance No matter how much is learned about chemical exposures or what measures individuals and governments take to manage them, some exposure risks will remain. For as the risk approaches zero, the cost of reducing exposures rises rapidly and exceeds any resulting health benefits. Under certain conditions, individuals can share the costs of those residual risks through insurance contracts. In this chapter, I describe the conditions in which people will agree to share risks and what strategies ameliorate insurance market failures when those conditions do not exist. Generally, environmental insurance markets face many problems and have not worked well. Insurance Markets and Risk: General Principles In well-functioning insurance markets, individuals transfer risks (the prevention costs of which exceed benefits) to insurance companies. Those companies accept the risks because the premiums they collect equal the claims they pay plus other business expenses (Shavell 1987, Chapter 8). Private insurance markets do not work well if there is adverse selection, moral hazard, or inadequate population-level information about the insured risks. Adverse selection exists when individuals know more about their individual risks than do insurance companies. Under such circumstances, people compare their risks with the best premium offered by an insurance company. Those individuals whose risks are less than the premium will self-insure, leaving the company with aboveaverage risks in its pool. An insurance company might realize this problem only after collected premiums do not cover subsequent claims. If a company then raises premiums, more individuals will opt to self-insure, the process will continue, and the eventual result will be no insurance policies. 59

CHEMICALS, CANCER, AND CHOICES Moral hazard occurs when a policyholder, after buying a policy and without the insurance company’s knowledge, changes his behavior in ways that make the insured-against event more likely to occur. For example, a person might drive more carelessly after purchasing automobile insurance. Again, this results in unexpectedly high claims. Finally, insurance companies cover risks only because they have accurate information about the incidence of damages in the population. Without such data, they cannot adequately calculate insurance premiums.1 Strategies to Manage Insurance-Market Failures Insurance companies have developed several strategies to cope with the information difficulties that lead to moral hazard and adverse selection. They use deductibles and copayments to reduce moral hazard. If customers must pay some of the damage costs themselves when accidents occur, they are less likely to engage in unanticipated risky behavior. Some firms also use experience rating (i.e., raising rates if a claim is made) to reduce moral hazard. Experience rating penalizes cautious clients who still suffer accidents, but insurance firms cannot economically differentiate those careful policyholders from morally hazardous ones. Insurance firms manage adverse selection through mandatory participation strategies (e.g., mandatory automobile insurance) and by varying premiums with the risks posed by different subgroups. If risks vary widely within the population but insurance companies cannot economically distinguish the differences, mandatory insurance prevents low-risk individuals from self-insuring and destabilizing the market. In effect, low-risk individuals are taxed to crosssubsidize high-risk individuals. Experience rating can also mitigate adverse selection by providing information that firms can use to lower premiums for low-risk individuals and keep them from withdrawing. A common ex ante information strategy companies use to avoid adverse selection is to vary premiums according to demographic, geographic, and occupational categories. Rural drivers have fewer automobile accidents; young males have more. Inner-city blacks experience more thefts than inner-city whites, even after controlling for income. 60

Insurance Consumer groups often argue that using such categories to set premiums is unfair because members of the demographic group who do not exhibit the average behavior are overcharged.2 These critics, however, fail to realize that if the causes of accident behavior are random variables with variances, some consumers will always be overcharged and others undercharged, no matter what variables are used to predict damages. Consumers, in fact, should be willing to ‘‘overpay’’ if the extra cost of gathering more accurate information eliminates any potential premium cuts. Even if insurance companies can overcome the specific information problems that cause adverse selection and moral hazard, they still need to know the population-occurrence rates of the insuredagainst harms in order to set premiums. To facilitate this, insurance firms pool claims-experience information under an antitrust exemption in the McCarran-Ferguson Act of 1945. During insurance premium crises, consumer groups and lawyers often urge the repeal of this permitted data collusion (Wines 1988; Gettinger 1986). Large insurance companies also favor such a repeal because they are big enough to gather their own data. The antitrust exemption aids small competitors who can purchase affordable population-level information from a central rating bureau and then enter the market (Harrington 1988, 45). Insurance Markets and Synthetic Organic Chemicals During the mid-1980s, insurance against risks posed by synthetic organic chemicals was expensive and sometimes impossible to obtain, for two reasons. 3 First, real interest rates had exhibited extreme variance during the previous 15 years. Real interest rates affect premiums for lines of insurance, such as medical malpractice and environmental liability, that pay claims years after premiums are collected. Second, the use of retroactive strict liability in the ‘‘Superfund’’ law and in various tort decisions has extracted wealth from insurance companies and made them wary of writing policies that could expose them to future legislative and court actions. General Liability Insurance Market Trends Liability premiums fluctuated widely during the 1970s and 1980s (McGee 1986; Cummins and Outreville 1987). In the mid-1970s, premiums rose rapidly, only to decline from 1979 through 1983. Premiums rose rapidly again from 1984 through 1986 and declined after 61

CHEMICALS, CANCER, AND CHOICES 1987 (Winter 1991). Consumer groups, such as the National Insurance Consumer Organization, charge that industry collusion and greed for investment income created this boom-and-bust cycle. There is little evidence that insurance companies underprice premiums when real interest rates are high only to hit consumers hard once interest rates drop (Tort Policy Working Group 1987). The collusion needed to coordinate such behavior appears impossible. The 20 largest general liability insurers controlled only 66 percent of the market in 1987 (Harrington 1988, 44). If some companies collude to raise premiums above the break-even level, other firms can raise new capital and enter the market.4 Winter (1991) argues that unstable interest rates, unanticipated changes in tort liability rules, asymmetric information, adverse selection, and capital market inefficiencies all caused difficulties for the liability insurance market during the 1980s. Real interest rates, of course, do and should play a role in insurance prices because premiums are paid before claims are settled. So future claims must be discounted by the current real interest rate to calculate a break-even premium. When real interest rates rise, premiums decline; when real interest rates decline, premiums rise. Smith (1989, 95) reports that interest rates have a significant and sizeable effect on premium levels. For every 1.0 percent increase in interest rates, premiums are reduced by 1.2 percent. A less conspiratorial explanation of the boom-and-bust insurance cycle involves large changes in real interest rates combined with large liability forecasting errors and long time lags before correction. Harrington (1988, 80–82) argues that future losses for general liability or malpractice insurance are difficult to predict because legal rules can change and accident results can manifest themselves years after the incident takes place. For example, accident-year losses5 grew at the same rate as GNP during the 1976–1981 period for general liability but grew 9.2 percent faster than GNP during the 1981–1985 period. If companies priced their early-1980s policies based on 1976–1981 trends, they might have waited to see if the 1981, 1982, and 1983 losses were aberrant before raising premiums. Although real interest rates declined in 1985, courts continued to use insurance policies as deep-pocket revenue sources, losses continued to mount, and companies raised rates drastically (Harrington 1988, 88–89). Changes in the interpretation of tort liability by courts have raised the average risk of insuring corporate environmental liability.6 62

Insurance Changes in the average risk have also been accompanied by an increase in the variance and greater asymmetry of information between insurance companies and their clients. Manufacturers who believe they are more immune to damage suits than the average have difficulty convincing insurance companies. Rather than buy insurance, those firms self-insure and drop out of the insurance market. That results in a higher average risk for the remaining clients, and the cycle continues. Capital market inefficiencies exacerbate the problems caused by adverse selection. Because corporate income is doubly taxed, earnings are retained during good times rather than dispersed to shareholders. When the supply of insurance is tight and profits are high, external capital does not enter the industry in optimal amounts because, once it is in the corporate sector, capital is not easily transferred back to individuals without dividend taxation. Also, external and internal capital are not perfect substitutes because of the asymmetry of information. If investors believe the best financial opportunities are reserved for insiders, any attempt to raise public equity is a signal that few profits are available. Managing Past Chemical Exposures Critics of the tort-liability system argue that changes in environmental law and judges’ interpretations of strict liability in toxic torts have altered property rights, created wealth losses for insurance companies, and made them reluctant to insure against chemical hazards (Abraham 1988, 965; Huber 1988a, 1988b). The evidence suggests that those critics are largely correct. The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) requires the EPA to ‘‘clean up’’ chemical disposal sites.7 The cleanup funds are raised through a combination of tort suits against companies that have had some connection with either the disposal site or the chemicals (joint-and-several strict liability) and taxes on petroleum production, hazardous-waste facilities, and chemical products.8 When judgments go against landowners, trucking firms, container corporations, or other firms less directly connected with the site, the defendants ask their insurance companies to pay these judgments. Courts, then, must decide whether liability insurance contracts cover such claims. 63

CHEMICALS, CANCER, AND CHOICES In many cases, judges have forced insurance companies to pay Superfund judgments despite policy clauses that disallow claims for gradual damage or damage to an insured’s own property (Abraham 1988; Rich 1985). Those rulings have caused great anxiety in the general and environmental-liability insurance markets because the alteration of property rights by judges creates both one-time wealth losses and uncertainty about future claims exposure.9 Supporters claim that CERCLA and the court rulings promote economic efficiency because they internalize externalities; they make ‘‘polluters’’ pay.10 Such reasoning has an economic basis only when companies did not practice due care (i.e., utilize disposal practices whose benefits exceeded costs at the time of disposal). Economic efficiency is about the present and the future, not about the past. What should be done about sunk costs or past behavior is not an economic question except insofar as those policies that pay for sunk costs might affect current and future decisions. An extreme example illustrates the underlying analytic methods. Suppose Congress decided that people were needlessly killed and injured in the 1940s and 1950s because automobiles lacked seat belts. To remedy this, Congress made all firms connected with automobile manufacture strictly liable for those past deaths and injuries, and judges ruled that insurance companies are liable for claims made under this ‘‘new’’ law. The relevant question for economic efficiency, of course, is whether consumers and firms properly equated the marginal costs and benefits of automobile safety given their real incomes at the time. If they did, then it is economically irrelevant that the rise in safety standards that accompanied the growth in real incomes since the 1940s has made those past automobile-accident deaths look tragic today, and the retroactive liability of the automobile companies would not be in accord with economic efficiency. CERCLA is directly analogous to this example. Just as the consumption of automobile safety has risen with increases in real income, so has concern for the environment and public health. The main efficiency question in the synthetic chemical industry is not what to do about past disposal practices but, rather, what to do about current hazards. Current chemical prices should reflect the damages that chemicals will create. The cleanup of past emissions might be a worthy endeavor given current real income, just as the 64

Insurance compensation of past automobile-accident victims might be. Some might believe both causes are so worthy that chemical and insurance companies should be taxed to clean up old disposal sites11 and automobile companies to compensate previous accident victims, but no efficiency rationale exists to support either policy. Indeed, to the extent chemical and insurance companies fear future retroactive taxes, Superfund’s efficiency implications could be very negative.12 To be sure, wealth transfers by juries, even if they are random, are insurable if their mean frequency and variance remain relatively constant. The result could be inefficient, however, if the risks of wealth transfers are larger than in other economic sectors and not diversifiable (Sansing and VanDoren 1994). Conclusion Insurance markets work well when damages occur at a known population rate, individuals can do little to alter their own damage risks, individuals have little knowledge about how their own damage risks deviate from the mean population risk, and real interest rates and property rights are stable. The damages created by synthetic chemicals exhibit very few of these characteristics; hence, environmental insurance markets have not worked well. Population exposure is known somewhat, but the epidemiological consequences are generally unclear for the lowlevel contamination often found in air and water. Business practices are not always observable; therefore, moral hazard and adverse selection are present. Real interest rates reached historic highs and lows over the last 20 years, and premiums have varied inversely. Finally, Congress and the courts have retroactively altered property rights and awarded damages regardless of contract language or the absence of causal evidence, so insurance companies fear writing new contracts.

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6. What Should Be Done? In this book, I have tried to answer two simple questions: What are the effects of chemical exposures on human health? And can markets effectively manage the adverse effects? The public and policymakers have placed impossible demands on scientists who study the effects of chemical exposures on human health. The health consequences of ubiquitous low-level chemical exposures that occur in modern industrial society are difficult to determine because scientists prefer to reduce the probability of falsepositive statistical errors to no more than 5 percent. Studies that can differentiate the health effects of low-level carcinogen exposure from normal background disease incidence require large numbers of subjects. Detecting a 1 percent difference in cancer rates between two groups requires approximately 27,000 subjects in each group. With fewer subjects, we could not be 95 percent confident that the 1 percent difference was real and not simply the result of sampling variation. Such studies are prohibitively costly. Thus, our knowledge of the effects of exposure from human studies is limited to those substances for which exposures are large and whose adverse health differences are easily differentiated from random variation. The same statistical limits affect animal studies. To save money, researchers conducting animal experiments administer relatively high doses to a manageable number of subjects. Analysts then extrapolate from the results to infer effects at the low exposures that humans face. Animal studies are controversial because human and animal metabolisms differ. Even if the species did not differ, the problem of extrapolating from high-level to low-level exposure effects would remain. Both human and animal studies are prone to two errors: declaring a substance to be a carcinogen when it really is not (false positive) or declaring a substance to be safe when it really is a carcinogen (false negative). The choice between these two types of errors is the basis for much of the carcinogen policy debate taking place in the 67

CHEMICALS, CANCER, AND CHOICES Congress, bureaucracies, the courts, and the press and among scientists themselves. The decision about which error is more important is not a scientific question that can be resolved through technical analysis. It is a value choice. Of course, better scientific knowledge reduces the probability of making incorrect inferences about health effects. But even in situations of high certainty, the choice between false-positive and false-negative errors remains. And people invariably weigh the trade-offs differently. How extensive are human chemical exposures? What are the epidemiological consequences of such exposures? And can markets supply the answers to these questions? The ability of markets to provide exposure information is affected by how exposure varies across households. If the variance is large, as it is with radon in the Northeast, private markets for exposure information develop quite easily. If the variance is small, collectively provided exposure information is more efficient because, once one household pays to ascertain air and water quality, other households will not contribute to the costs of acquiring information. What are the consequences of exposure? Basic epidemiological information has classic public-good attributes. Those who conduct basic research have difficulty restricting its consumption to those who contributed to the research costs. But once it is developed, private markets disseminate the knowledge through newspapers, magazines, and even television. So markets can disseminate information about the health consequences of exposure. But that information leaves undecided many basic value choices. When Exposure Is a Private Good The good news is that most chemical exposures are private goods. Thus, choices can vary across individuals, just as they do at the supermarket. Many are skeptical about whether choices concerning chemical use should be left to individuals, noting that this ignores the different levels of scientific awareness among people. In their view, just because the New York Times regularly reports the results of epidemiological and animal studies does not make it good policy to leave decisions about exposures to individuals, because most people do not read the New York Times. But in return for a fee, 68

What Should Be Done? professionals assist people with the information necessary to make choices. So the concern about people’s ability to make informed choices really is an equity concern about the need to subsidize the provision and utilization of information. A variety of policy ‘‘remedies’’ are available for such equity concerns, but they all tax some people and transfer the proceeds to others. The policies range from simple tax-and-transfer schemes to vouchers to ‘‘free’’ government information to mandates that firms provide information. The programs vary in their effects on market efficiency. A general lesson from economics is that if redistribution occurs, it should augment purchasing power rather than directly alter the behavior of market participants. Some analysts believe the market for information about the health risks of chemical exposure will be not only inequitable but also inefficient. One efficiency concern is that individuals would be overburdened by the sheer number of remote health contingencies that they must consider, even though most exposures will not result in disease. Bureaucratic regulation and liability rules are institutional responses to these concerns. Bureaucratic regulation consists of two activities: the development of scientific information and the issuance of regulations based on that information. Most would argue that the quasi-public-good nature of basic research requires government subsidy, but Ames’s critique of the National Toxicological Program casts doubt on what benefits taxpayers have gained from such research. Even if one grants a governmental role in the development of information, commandand-control regulations cannot be efficient because they do not allow choices to vary across individuals, an inherent feature of efficient solutions. Liability rules can enhance efficiency, but no single liability rule efficiently manages the risks created by all chemicals in all situations. Instead, trade-offs exist whose appropriate resolution varies across cases. Strict liability emphasizes the prevention of harms created by product use and is insensitive to the role that consumers’ care levels play in damages. The negligence rule hurts firms less but allows consumers to have inefficiently high activity levels and inefficiently low care levels. In addition, firms might reorganize to evade even their minimal responsibility for due care. Strict liability with contributory negligence forces courts and juries to determine appropriate 69

CHEMICALS, CANCER, AND CHOICES care levels, a process in which they may make serious errors. Finally, a no-liability regime will not hurt firms, but the level of damages in society might be greater than optimal. Thus, the optimality of liability rules is largely empirical and product specific. The issue of whether torts have efficiently reduced risk is an important but extraordinarily difficult question to research. Because litigants choose whether to bring suit, the cases that actually result in a trial and a court judgment are not a random sample of torts. In fact, court cases are composed primarily of two types of suits: those with extraordinarily high potential judgments and those whose facts are very close to court decision rules. One cannot easily study whether legal rules favor plaintiffs or defendants because the rules primarily determine whether individuals go to trial rather than the trial’s outcome. The selection effects dominate the decision effects. If liability rules cannot be tailored to the characteristics of particular products, the choice between inefficiencies depends on which errors one considers most costly. Individuals will vary in their assessment of these trade-offs. No ‘‘correct’’ answer governs them, even for libertarians. In the case of chemical exposures that are private goods, government (to the extent that it does anything at all) should limit its activities to the provision of information so individuals can decide for themselves which risks to bear. Command-and-control regulations inhibit the development of robust private information markets because people think that if a product is for sale, the government must have checked it out to ensure that its benefits were greater than its harms. If people understood that no omniscient, benevolent agent protected them from potential harm, they might be more cautious about their decisions to use chemicals. In turn, companies would provide more information about their products to reassure customers. And private certification companies would develop reputations for the integrity of their claims about health effects. These speculations lead me to argue that we should consider the possibility of a no-liability or buyer-beware liability regime. I believe the voluntary development and dissemination of information by firms about the consequences of exposure to their products would be much greater than it is today because consumers would realize 70

What Should Be Done? that no government backup existed. To the extent that liability rules exist, they should be restricted to the negligence rule rather than strict liability: the former makes firms responsible for blatant errors in judgment but does not make them responsible for all the risks created by their products. When Exposure Is a Public Good The basic difference between public and private chemical exposures is that a major method of conflict resolution in private exposures—differences in individual exposure governed by personal choice—is not available with public exposures. Within the same airshed or watershed, all must consume the same exposure level. Regulation Command-and-control regulation is a rather blunt instrument for achieving an efficient level of public exposure. Its primary defect is its inability to allow emissions to vary across emitters in proportion to their marginal costs of abatement. That inability raises the cost of any specific level of ambient exposure reduction. Empirical analysis of regulatory decisions suggests that agencies are sensitive to the costs and benefits of risk reduction but demand far more reduction in public exposure risks than individuals require for private risks. The EPA values risk reduction at approximately $35 million per life saved, about seven times the $5 million value that individuals place on their own lives when they voluntarily accept work-related risks. Under improbable assumptions, the costs of EPA regulation might not be excessive. More likely, EPA regulation is overzealous rather than efficient. Torts Simple torts are an inadequate institutional response to public exposures because the benefits of a court decision cannot be restricted to those who bring suit. Class-action torts solve the problem by including as plaintiffs all possible beneficiaries of a successful suit. The use of class action solves the free-rider problem, but all the other trade-offs discussed in the context of torts and private exposures remain. Torts face at least three problems. The first is the time lag between exposure and adverse health effects and the related difficulty of 71

CHEMICALS, CANCER, AND CHOICES using causal knowledge at the population level to infer causality at the individual level. Until courts accept the use of expected-value damages as an appropriate remedy, the use of torts to mitigate public exposures will waste resources in futile attempts to ascertain the effects of exposure at the individual level. A second impediment is the inability of courts to vary their judgments to fit the variation in preferences within the class of plaintiffs. Remember that optimal public exposure equates the sum of the marginal benefits with marginal costs. How are courts to determine the nature of the benefits of exposure reduction across individuals within the class? Another limitation of class-action torts is that their usefulness declines as the number of defendants grows. Torts are not an effective institution, for example, to limit freon emissions from automobile air conditioners. Emissions Rights Emissions-rights solutions to public exposure disputes reduce conflict through the use of individual choice and differentiation. Once created, emissions rights would allow the environmentally concerned to purchase rights and bank them, thus reducing exposure. And firms that wished to increase emissions could expand the supply of rights by compensating exposed citizens. The difficulty with emissions rights is that benefits and costs could not be restricted to those who bought and sold them. If the Sierra Club, for example, bought emissions rights and then banked them, all citizens in the relevant airshed would benefit, regardless of whether they paid club dues. This free-rider problem, in turn, would increase the importance of the initial allocation of emissions rights. Thus, the political disputes in emissions-rights systems would be quite vigorous during the initial allocation of rights, but changes thereafter would reflect the quiet humming of markets. In my view, emissions rights are superior to bureaucratic regulation. Current command-and-control standards should be converted into equivalent tradeable emissions rights, and then common-law suits should handle disputes that result over their use. The Environmental Insurance Market Even if the risks are efficiently managed, damages will result from chemical exposures because the costs of reducing damages to zero 72

What Should Be Done? will be too great relative to the benefits. Markets manage such residual risks through insurance. But insurance firms have been reluctant to insure many chemical risks. There are two reasons for the reluctance of the insurance companies. First, the absence of good epidemiological knowledge has led to unpredictable court judgments. Sometimes courts give large awards for health damages allegedly caused by chemicals, and sometimes they do not. Of greater importance is the willingness of both Congress and the courts to alter property rights retroactively to redistribute the wealth of chemical and insurance companies to pay for cleanup and healthcare costs. Retroactive taxation of chemical or insurance companies is analytically equivalent to retroactive taxation of automobile companies because lives were lost in automobile accidents in the 1940s that would not be lost today under current notions of appropriate safety levels. Neither policy has anything to do with economic efficiency because efficiency looks forward rather than backward. Society might wish to tax chemical and insurance companies to clean up past disposal sites and provide compensation, but we must recognize that taxes alter behavior. If a state taxes sales, people shop in other states; if governments tax equities, people buy real estate; if Congress and the courts tax liability-insurance contracts (and their supply and demand are elastic), companies stop writing them. The retroactive alteration of property rights and the backwardrather than forward-looking perspective created by the Superfund program have had a chilling effect on private environmental insurance contracts. If Congress wants to clean up old sites, it should do so with general funds. The use of retroactive strict liability embodied in the Superfund program should be repealed. A less known but equally important impediment to stable environmental insurance markets (because of the long lag time between premium payment and damage claims) is erratic real interest rates. The political mismanagement of monetary and fiscal policy and the resulting inflation during the 1968–1979 period continue to affect real interest rates even today.

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Notes Chapter 1 1. Efficient outcomes make at least one person better off and no one worse off as the result of choice. Choices that make some better off without making others worse off are described as having gains from trade and are labeled Pareto optimal or just optimal. Neoclassical economic theory argues that, under most circumstances, a system of property rights and markets produces these efficient outcomes. But this system is efficient only if all the effects of choices are included in market prices. If prices do not incorporate all these effects, such situations are described as inefficient or market failures. 2. Equity or value conflicts involve the initial creation and distribution of property rights. Equity conflicts also arise when some citizens want to alter property rights by majority-rule political decisions instead of market transactions. Equity conflicts cannot be resolved with unanimous consent, while efficiency conflicts can. 3. Risks are private goods if individuals choose to purchase particular products, work at specific jobs, or live on certain parcels of land. 4. Public goods have two qualities. Their consumption is difficult to restrict to just those who pay and is nonrivalrous (i.e., one person’s use does not significantly detract from another person’s). Private goods have opposite characteristics.

Chapter 2 1. Gribble (1991) criticizes participants in the carcinogen debate for improperly using the word ‘‘synthetic’’ to mean ‘‘manmade.’’ Plants and animals produce halogenated hydrocarbons, including the infamous polychlorinated biphenyls (PCBs), and living things emit most of the environment’s chloromethane. Nevertheless, I will use the words ‘‘synthetic’’ and ‘‘natural’’ as the debate participants use them. 2. The averages of random samples of a population are normally distributed. Therefore, the standard deviation of the population of sample means is the standard deviation of the population from which the sample is drawn divided by the square root of sample size. If we standardize the data to have a mean of 0.0 and a standard deviation of 1.0, then the standard deviation of the sample mean is 1.0 divided by the square root of the sample size. To be 95 percent confident that the incidence of insomnia in one group is smaller than the incidence in another group, the incidence in the first must be at least 1.64 standard deviations smaller than the incidence in the second. The sample size required to detect any given difference in means is approximately the square of 1.64 divided by the difference—in this case, (1.64/0.05)2 or 1,075.84. 3. The critical values for various sample sizes that reduce false positives to less than 5 percent are as follows:

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NOTES to pp. 6–13 Sample Size Critical Value 50 0.23 100 0.164 1,000 0.052 5,000 0.023 10,000 0.016 26,896 0.01 2,896,000 0.001 4. Epidemiologists usually do not study the effects of chemical exposures in humans in true experiments, but the statistical inference issues they face are identical. 5. See Cross, Byrd, and Lave (1991) for a good discussion of discernible differences between cancer incidence for any subpopulation and the mean incidence in the United States. 6. If researchers were certain their results were not the result of sampling variation, they would be said to be 100 percent confident of their results. If errors from sampling variation were only 5 percent likely, researchers would be 100 percent minus 5 percent (or 95 percent) confident of their results. 7. Pr(Z) ⬍ (0.23 ⳮ 0.052)/(1/500.5) Pr(Z) ⬍ 0.178/0.141 Pr(Z) ⬍ 1.26 ⳱ 0.894. 8. In Figure 1, the probability of false-negative errors is 89 percent because the assumed truth (5.2 percent) is relatively close to the null (0 percent) and far from the 5 percent false-positive critical value (23 percent). 9. In Figure 2, the probability of false-negative errors is 50 percent because the assumed truth (5.2 percent) is relatively far from the null (0 percent) and close to (actually, exactly the same as) the 5 percent false-positive critical value (5.2 percent). 10. See Mendeloff (1988) Chapter 1, especially footnote 11; and Page (1981). 11. Ideally, participants’ recall is verified by other records (when possible) and careful questionnaire construction. 12. Feinstein (1988) is a prominent critic of the pseudo-scientific character of much epidemiological work, and this section draws extensively from his work. But some of the concerns were raised earlier by Gordis (1979) and Berkson (1946). 13. Bennett (1994) argues that poor people are more subject to disease and more likely to live near electric-power eyesores, such as substations. Thus, we find a spurious relationship between proximity to electric-power facilities and cancer. 14. Feinstein’s arguments about detection bias come from his comparison of data on disease incidence reported by hospitals and public health agencies and incidence data derived from autopsies. While his arguments have generated much controversy among epidemiologists, I believe his responses are more than adequate. See Kass and Shapiro (1989), Feinstein (1989), Poole et al. (1990), and Feinstein et al. (1990). 15. Doll and Peto (1981, 1203) provide a definitive list of human carcinogens. See National Toxicology Program (1994) for the U.S. government’s most recent list of carcinogens. 16. The Centers for Disease Control and Prevention recently annnounced that ageadjusted incidence and deaths from cancer decreased in the 1990-1995 period, at an annual rate of 0.7 percent (Stolberg 1998; Wingo et al. 1998). 17. Some of the increase stems from changes in the International Classification of Diseases (U.S. Department of Health and Human Services 1980). 18. Davis (1989, 334) says:

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NOTES to pp. 13–15 As to the relative impact of food-borne and synthetic carcinogens, recent trends in cancer patterns in older persons in industrial countries require a careful search for potential changes in the environment in the past decades that may explain these changes in prevalent types of cancer. Among factors to be explored are changes in the following: exposure to infectious disease; cigarette smoking habits; occupational exposures; diagnostic procedures; food consumption, preparation, and handling, such as refrigeration and preservation; environmental pollution patterns, including alterations in air pollution, energy production, transportation, electromagnetic radiation, radon, and pet domestication. 19. Doll and Peto (1981, 1245–47) argue that the increase in lung cancer is almost exclusively the product of tobacco use. It is possible, of course, that more generalized exposure to air pollution is responsible, but they do not believe this is the case, since urban nonsmokers do not have increased lung-cancer mortality. In addition, cancer mortality in countries whose populations have similar smoking histories, such as Finland and England, is similar, even though pollution levels vary considerably from country to country. 20. Stolberg (1998) reports that federal funding alone has exceeded $30 billion since President Nixon declared ‘‘war’’ on cancer in 1971. 21. Rall (1991, 10) reports typical experiments use 50 to 100 animals; thus, one can detect, with 95 percent certainty, only incidence differences of about 20 percent or more. 22. MTD is the maximum amount of a substance that can be added to a daily mouse or rat diet without killing the animal or producing obvious adverse effects. Current National Toxicology Program (NTP) guidelines specify three dose levels: MTD, MTD/2, and MTD/4. MTD/4 is called a ‘‘low’’ dose even though it is thousands of times greater than human exposure. 23. Gold et al. (1992, 261) report that, by 1992, synthetic chemicals comprised 79 percent of the chemicals tested in both rats and mice. 24. See Lave, Ennever, Rosenkranz, and Omenn (1988) for a general discussion of animal tests. 25. One rationale for using the B6C3F1 mouse is that 75–80 percent survive to the end of a typical two-year study. 26. Doll and Peto (1981, 1216) write: Possibly misleading conclusions are being drawn from over-emphasis on the spectrum of chemicals found active in mutagenicity tests and in chronic carcinogenicity studies in rodents. For example, the authors of official guidelines on how to do long-term tests usually emphasize the importance of concurrent controls and the need for strictly identical diet, handling, heat, light, stress, and infection in the treated and control animals. Why can minor details of the lifestyle of the animals really be important determinants of the animals’ ‘‘spontaneous’’ tumor yields? And if so, might not the same also be true for humans? 27. The series of articles in which Ames and his critics debate the role of cell proliferation appeared from 1987 to 1993: Ames, Magaw, and Gold (1987); Epstein and Swartz (1988); Ames and Gold (1988); Ames and Gold (1990a); Cohen and Ellwein (1990); Abelson (1990); Marx (1990); Perera (1990); Ames and Gold (1990b); Rall (1991); Ames and Gold (1991a); Weinstein (1991); Cogliano et al. (1991); Ames and Gold (1991b); Ames and Gold (1991c); Cohen and Ellwein (1991); Perera, Rall, and Weinstein (1991); Gold et al. (1992); and Abelson (1993a, 1993b).

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NOTES to pp. 15–21 28. Natural endogenous DNA damage in rats has been documented to be very high (100,000 DNA mutations per cell per day) (Ames and Gold 1990a, 970). Most is repaired, but the steady-state level of just 1 of 20 possible DNA mutations in rats is approximately 47,000 per cell. The endogenous level of DNA damage is so high that exogenous chemicals cannot significantly increase the level unless the chemicals also cause increased cell division (mitosis) (Ames and Gold 1990a, 970; Marx 1990, 744; Cohen and Ellwein 1990). 29. Of the 365 chemicals classified as carcinogens in the CPDB by January 1991, 44 percent are carcinogenic only at MTD—not at MTD/2 (and MTD/2 is a high dose). See the response of Ames and Gold (1991a, 13) to Rall (1991). 30. If one believes that the large rate at which substances induce cancer in animals (i.e., 50 percent) is an artifact of the dosages used, then one cannot use the findings of such experiments to make claims about the relative cancer risks created by exposure to natural and synthetic chemicals. Ames uses the results of experiments with natural products to demonstrate the absurdity of the current testing regime. 31. Ames, Magaw, and Gold (1987, 272) report that several factors also affect even this relative comparison: First, at low dose rates human susceptibility may differ systematically from rodent susceptibility. Second, the general shape of the dose-response relationship is not known. A linear dose response has been the dominant assumption in regulating carcinogens for many years, but this may not be correct. If the dose responses are not linear but are actually quadratic or show a threshold, then the actual hazard at low dose rates might be much less than the HERP values would suggest. An additional difficulty is that it may be necessary to deal with carcinogens that differ in their mechanisms of action and thus in their dose-response relationship. We have therefore put an asterisk next to HERP values for carcinogens that do not appear to be active through a genotoxic (DNA damaging or mutagenic) mechanism so that comparisons can be made within the genotoxic or nongenotoxic classes. 32. A humorous example illustrates our inconsistent approach to exposure. The Detroit News analyzed the soil under a development proposed by Mayor Coleman Young and reported that it contained certain chemicals that exceeded EPA recommended levels. The mayor retaliated by having a copy of the newspaper analyzed and revealed that it contained levels of aluminum, copper, zinc, and manganese that exceeded EPA limits for solid waste and soil (Associated Press 1992). 33. But remember that the distinction between natural and synthetic is much fuzzier than participants in the debate usually recognize. 34. Gori (1991, 226) says, ‘‘to defend animal tests by saying that most of the few known human carcinogens are also carcinogens in animals is a classic non-sequitur: all rats are mammals; therefore all mammals are rats.’’ 35. Lave and Ennever (1990, 71) state that 26 chemicals are thought to be human carcinogens, 600 are known rodent carcinogens, 1,000 are known bacterial mutagens, and 50,000 have unknown effects. Considering a chemical a human carcinogen if it is a rodent carcinogen eliminates most false negatives for known human carcinogens but creates false positives. 36. The functional form and statistical uncertainty of the estimated dose-response relationship must be identical across chemicals. 37. Davis (1989, 332–33) also argues that neither the HERP index nor, implicitly, an analogue developed from the TI rather than the TD50 measure can account for

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NOTES to pp. 21–22 interactions that take place among all the different compounds found in food. Scholars who have investigated the interactions between various chemicals and carcinogenesis have concluded that the physiological effect of mixtures of compounds may be less than the effect of each of them in isolation (Safe 1997, 1998a, 1998b, 1998c). 38. This has been a contentious issue for some time. When the Food and Drug Administration banned cyclamates as a food additive in 1969 after rats were fed the amount of cyclamates in 500 cans of soda per day over their lifetimes, the New York Times reported: The man who discovered cyclamate, Michael Sveda of Greenwich, yesterday questioned the test methods that led the government to condemn cyclamate. ‘‘If massive doses of it are bad, does this mean that normal doses will cause cancer? . . . A 3 per cent salt solution will kill you, too, if you drink too much of it,’’ Mr. Sveda said. ‘‘They should have tried to find out what effect massive doses of sugar would have on the rats, too.’’ (Schmeck 1969) The FDA removed saccharin from its list of approved food additives in 1972, after it caused bladder tumors in rats. The rats were fed a daily amount of saccharin equivalent to the amount in 875 bottles of diet soda (Schmeck 1972). In late 1997, the scientific advisory panel to the National Toxicology Program (NTP) considered removing saccharin from the NTP’s list of suspected carcinogens at the request of NTP scientists but voted 4 to 3 to leave saccharin on the list (Stolberg 1997). 39. Perera (1990, 1644) states: In light of uncertainty about mechanisms and human dose-response, the assumption of low-dose linearity continues to be a reasonable one. . . . The large and growing burden of cancer in the United States (now at 500,000 deaths per year) vividly demonstrates the need for prevention. . . . Prevention means not only addressing those cancer risks already established as ‘‘major’’ contributors to the disease burden (such as smoking) . . . but also reducing current involuntary exposures to identified industrial carcinogens. 40. ‘‘Unfortunately, there has been an uncritical acceptance of the notion that a positive result in a rodent bioassay automatically implies a carcinogenic risk for humans. While this may well be the case for genotoxic agents, for nongenotoxic substances there will be exceptions, especially if the proliferative response occurs only at high doses’’ (Cohen and Ellwein 1991, 903). 41. Weinstein (1991, 387) notes that Ames’s views often seem to venture beyond the strictly scientific: About a decade ago Bruce Ames developed a database indicating that a large number of carcinogens are mutagenic in bacteria. This led him to conclude that ‘‘carcinogens are mutagens’’ and he mounted a vigorous campaign to alert all of us to the dire health hazards of synthetic chemicals, even warning us that children peacefully asleep at night were at great risk because of trace amounts of mutagenic flame retardants in their pajamas. [Ames now] expounds the opposite idea that synthetic chemicals pose a negligible cancer risk to humans. . . . [and argues] that environmental policies and regulatory guidelines should follow this new dictum. 42. These elements include potassium (found in food) and uranium, thorium, and radon (found in the soil and air). Estimates of cancer incidence from naturally occurring radioisotopes use data on human exposure to the atomic bombs dropped on Japan and to early radiation therapy.

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NOTES to pp. 23–27 43. Some scholars use the term ‘‘background rate’’ to refer to the total percentage of deaths in the United States attributable to cancer—about 20 percent. See Cross, Byrd, and Lave (1991, 83).

Chapter 3 1. Private goods, as economists use the term, are commodities whose consumption is rivalrous and can be restricted to those who pay. That is, two people cannot consume a private good simultaneously. This chapter examines situations in which individuals purchase a particular commodity, choose a particular job, or reside in a particular location. 2. For recent scholarship on market mechanisms to assure quality, see Klein (1997). 3. This example illustrates the ‘‘private-good’’ nature of many health risks. New studies about radon exposure risks do not alter the example’s purpose (Leary 1994; Associated Press 1996; Warner, Mendez, and Courant 1996). 4. On Tuesdays, the New York Times has a section called ‘‘Science Times,’’ in which journalists with scientific training review topics in leading science journals. The July 5, 1994, edition, for example, ran a story that summarized fairly well the issues involved in making human carcinogenic inferences from animal tests (p. B5). 5. Direct subsidy of commodities by taxpayers as a solution to equity concerns receives little if any support from the economics community because the legislature rather than individuals make expenditure decisions. But direct commodity subsidies are politically popular because expenditures can be directed to particular firms and geographic areas by legislators. 6. To the extent consumers value the knowledge, product prices may rise to reflect the benefit. See Summers (1989) and Gruber and Krueger (1991) on the economic incidence of mandated benefits. 7. The Congress has increasingly mandated the provision of information. The interest on loans has to be described in terms of an annualized percentage rate as well as the actual dollar cost of interest over the term of the loan. Information about investments also has to be provided to investors in standardized format in a prospectus. As of May 1, 1994, information about the nutritional content of processed foods had to be presented on the label in a format that is very user friendly. Cigarette and alcoholic beverage labels tell consumers of the dangers of the products. And major household appliances cannot be displayed for sale without information about their annual energy usage. 8. In the words of Landes and Posner (1987, 280), ‘‘It hardly pays, when buying a case of beer, to enter into a contract specifying rights and duties in the event that one of the bottles of beer explodes in your face.’’ 9. Another problem the literature often discusses is people’s inability to compare future costs or benefits with present costs or benefits. For example, many analysts argue that consumers incorrectly compare current capital expenditures with savings in future operating costs. The required return on capital that consumers implicitly reveal by purchasing appliances with lower initial costs but higher operating (energy) costs is often much higher than returns available on other assets, which is difficult to reconcile with optimal behavior. Some energy analysts favor energy use standards as a ‘‘solution’’ to this apparent market failure. Dreyfus and Viscusi (1995), however, estimate the willingness of consumers to spend more now to save fuel costs later

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NOTES to pp. 28–35 and find pure rates of time preference on the order of 11–17 percent, which are consistent with returns on other assets. 10. See Shavell (1987) and Landes and Posner (1987) for comprehensive discussions of liability rules and efficiency. 11. If the court selects the optimal level of due care, then due care will include all activities whose costs are less than the damages prevented. 12. Care levels refer to preventive measures taken during an activity, such as wearing goggles while using a chain saw. Activity levels refer to how much one engages in an activity, such as how much wood one cuts with a chain saw. 13. When both injurers’ and victims’ care and activity levels affect damages but the victims do not purchase products from the injurers, as in cases of damages to cyclists from automobiles, no liability rule is optimal (Shavell 1987, 29). In contrast, if cyclists suffer damages as a result of defective bike manufacturing, strict liability induces bike prices to reflect aggregate damages. 14. Firms often have a hard time convincing consumers to ‘‘purchase’’ safety, even at low marginal costs. Ford introduced seat belts as part of a safety options package in their 1956 model-year cars and based their marketing on safety. Chevrolet, with its emphasis on jazzy wheels and V-8 engines, soundly beat Ford that year, and Ford quickly returned to selling ‘‘hot’’ cars (Iacocca 1984, 296–97). 15. Some advocates of no liability believe the transaction and knowledge costs that allegedly prevent market solutions to risks and damages are not as high as some people claim. 16. Danzon (1988, 117), for example, estimates that 60 percent of medical malpractice insurance premiums is consumed by lawyer fees, court costs, and overhead, while only 20 percent of first-party insurance premiums is not paid out in compensation. 17. See Huber (1988b, 220) for questionable strict-liability decisions, including one in which a jury awarded $986,000 to a woman who lost her psychic powers after a CAT scan. But Henderson and Eisenberg (l990), who examined the universe of product-liability cases from 1984 to 1987, conclude that recent tort decisions equate costs and benefits better than Huber (1988a, 1988b), Priest (1988), and Abraham (1988) claim. 18. Shavell’s (1987, 54) defense of strict liability with contributory negligence for products that are purchased is narrower than Landes and Posner’s. Shavell argues, correctly, that aggregate damages will be embedded in product prices. But that can be inefficient if consumers’ behavior affects the chance of damages and consumers’ care or activity levels vary. 19. The nominal costs are assigned to firms. How much actually affects product prices, employee wages, and capital depends on demand and supply elasticities. For example, if consumer demand for products governed by strict liability is very inelastic (i.e., very price insensitive), consumers will bear most of the actual costs. 20. I believe Landes and Posner prefer strict liability to a negligence or no-liability environment because they implicitly believe that knowledge would not be discovered, disseminated, and used to inform decisions as quickly under the latter two regimes. While the public sector, in theory, could tax citizens to purchase knowledge from firms and disseminate it, in practice, Landes and Posner must believe the public sector will not provide an optimal supply of knowledge about product damages. In addition, they must believe the efficiency gains from decoupling insurance and product prices would be more than offset by the difficulties in operating first-party insurance markets (Rothschild and Stiglitz 1976).

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NOTES to pp. 36–45 21. People can use certain products, like airplane trips, only once per purchase. The use of other products, like home barbecues, can vary widely among individuals. The former products create fewer efficiency losses when damages are embedded in their prices. 22. Because of the law of diminishing returns, their assumption of sharply increasing marginal costs of emissions reduction is not controversial. 23. Kolstadt, Ulen, and Johnson (1990) claim that regulation and torts are complements rather than substitutes. Regulation enhances tort efficiency by removing uncertainty about the due-care standards that courts will select. Their argument seems relevant regardless of whether the standard is only informational or is also the basis of legally required behavior. 24. See Owen and Braeutigam (1978), MacAvoy (1979), Lave (1981), Breyer (1982), Crandall (1983), Litan and Nordhaus (1983), Noll and Owen (1983), Weiss and Klass (1986), and Kahn (1988). Other relevant works appear in the Brookings Institution’s Studies in the Regulation of Economic Activity series, the American Enterprise Institute’s Studies in Government Regulation series, and the Cato Institute’s Regulation journal. Finally, I refer the reader to the writings from the ‘‘Chicago School’’ authors Becker, Peltzman, Posner, and Stigler as well as almost any issue of The Journal of Law and Economics. 25. Remember the risks under discussion are private. They arise only in the context of a particular job or residential choice or in the consumption of a particular product. 26. Critiques of the role of government in basic and applied research include Kealey (1996) and Cohen and Noll (1991). 27. Most discussions of regulation versus liability do not differentiate between public and private damages or between the development of knowledge, the dissemination of knowledge, and the actual regulation of behavior. 28. Shavell (1984) discusses this indirectly when he notes that compliance with regulatory standards should not protect agents from liability nor should failure to comply automatically imply liability. But he does not take the next logical step and conclude that, in the case of private goods, such an admission severely undermines the case for actual regulation of behavior rather than provision of knowledge. See Peltzman’s (1974) analysis of prescription drug regulation. 29. Consumer Reports illustrated that information alone can be a powerful weapon for consumers when it rated as unacceptable the Suzuki Samurai in 1988 (Levin 1988) and the Isuzu Trooper in 1996 (Boot 1996). 30. The provision of information does not solve the problem of transaction costs, but good information could allow consumers to differentiate choices with large risks from those with small risks, concentrating their limited cognitive abilities and time on the most important choices. 31. Alan Altshuler, then dean of Harvard’s Kennedy School of Government, argued that the San Diego experiment showed that building codes could be changed to make housing less expensive without compromising safety (DeParle 1993). 32. Providing information is superior to regulating behavior both economically and politically. The EPA surveyed people about their policy preferences regarding a variety of chemicals, including nitrites, hair dyes, saccharin, and food-coloring additives. Strong majorities favored warning labels instead of bans for all except Red Dye #2 (Weidenbaum 1986, 215).

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NOTES to pp. 47–55 Chapter 4 1. Commodities are public rather than private goods if their consumption is difficult to restrict to those who pay for them. In the case of chemical exposures, public risks are created through air and water pollution that individuals cannot alter. 2. Air and water quality are really ‘‘club’’ goods because their consumption has geographic boundaries. Migration between clubs allows individuals to consume air and water that differ in quality. People with strong preferences for clean air, for example, can move from Los Angeles to Anchorage. 3. The creation by the Federal Communications Commission (FCC) of new property rights for personal communication services (PCS) is instructional. The new PCS services are thought by investors to be so valuable that their bids for electromagnetic spectrum rights include payments to buy out the current users of that portion of the spectrum and set them up with equivalent personal communications services (Andrews 1992). 4. The creation of additional emissions rights faces another obstacle: the firms most likely to benefit from the right to emit are potential rather than existing firms. In fact, existing firms have strong incentives to use environmental protection as an entry barrier to new firms. Crandall (1983) argues that the emissions regulation of stationary sources is explained largely by this motive. 5. Firms would likely face fewer free-rider problems than citizens, but the firms that would benefit most from emissions expansion (potential firms) would face difficulties similar to those faced by citizens. 6. Gillette and Krier (1990) single out Zeckhauser as deserving particular scorn for his neoclassical risk analysis. For a concise statement of such an analysis, see Zeckhauser and Viscusi (1990). 7. But note that the 1990 Clean Air Act amendments created a market for sulphur dioxide emissions from coal-fired electric utilities. The initial rights in this market were given to existing utilities in proportion to their current fuel use with no political fallout (Lock and Harkawick 1991, 24). 8. The agencies included were the Consumer Product Safety Commission, FDA, EPA, and OSHA. 9. Remember that animal data are the basis for the calculation of the risks created by exposure. Thus, any risk analysis exercise might be of questionable value. 10. The authors argue, though, that the EPA’s notion of risk is fatally flawed because it assumes that the risk is zero if the pesticide is banned rather than the difference between the pesticide risk and whatever replaces the pesticide. 11. Class-action suits are also used when exposure is a private good but numerous individuals all suffer the same damages from exposure. Such class actions exploit economies of scale that arise from the nearly identical circumstances across cases. 12. For example, Brennan (1993) argues that the answer to chlorofluorocarbon (CFC) pollution is not a suit against all the users of spray cans and refrigerators. 13. Empirical work about the liability system utilizes several famous data sets. The Insurance Service Office, a research arm of the insurance industry, randomly sampled product liability claims in 1976 and 1977, but the universe represents only claims. Viscusi (1986, 1988, 1989b) has extensively used these data. The Rand Corporation has assembled the results of all civil jury trials held in federal and superior state courts in Cook County, Illinois, and San Francisco, California, from 1959 through 1984 and issued a series of studies (Peterson 1986).

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NOTES to pp. 60–65 Chapter 5 1. Risks for rarely occurring events provide business for the Lloyd’s Syndicate of London. Lloyd’s is a consortium of wealthy investors who agree to back insurance contracts with their entire personal fortunes (unlimited liability) for such events as the loss of an opera singer’s voice or an oil-tanker catastrophe. Lloyd’s was a primary purchaser of corporate environmental liability reinsurance contracts, but it suffered many losses on those contracts and was forced to restructure itself in 1993, ending its 300-year history of unlimited personal liability (Raphael 1995). 2. See New York Times editorial (April 20, 1983, 26), the ACLU response (April 29, 1983, 30), and an interview in the ‘‘Week in Review’’ (August 16, 1987, section 4, 26). 3. Between 1982 and 1986, environmental liability insurance premiums increased 11-fold (General Accounting Office 1987, 69; 1988, 19). 4. Harrington (1988, Table 3-2) reports that the large rate increase in 1985 and 1986 did attract a tremendous amount of new capital (over $5 billion in 1985) to the insurance industry. 5. The financial results of insurance contracts are reported on both a calendar-year and accident-year basis. Accident-year financial results report the premiums and payouts for the year an accident occurred rather than the year of the payout (Harrington 1988, 53). 6. In Beshada v. Johns-Manville Products Corp., 90 N.J. Supreme Court (1982), the court held the defendant liable even though the hazards associated with low-level asbestos exposure were unknown and unknowable. 7. CERCLA, P.L. 96-510; Superfund Amendments and Reauthorization Act of 1986 (SARA), P.L. 99-499. For a comprehensive survey of developments in statutory and common law dealing with hazardous wastes to 1986, see Harvard Law Review (1986). 8. In CERCLA, Congress taxed the production of 42 chemicals ranging from 29 cents per ton on hydrochloric acid to $4.87 per ton on benzene. Petroleum production was taxed at 79 cents per barrel, and hazardous waste facilities were taxed $2.13 per disposed ton. SARA extended the taxes but lowered the petroleum tax to 11.7 cents per barrel on imported oil and 8.2 cents per barrel on domestic oil, imposed a 0.12 percent tax on corporate income, and added a 0.1 cent tax per gallon on gasoline to pay for leaky storage tanks. 9. State courts continue to hold insurance firms liable for environmental damages under general corporate liability policies even when policy language specifically denies pollution coverage (Quint 1994). 10. Davis (1985, 412) reports, ‘‘Environmental groups say it [the feedstock tax] is fair because it puts the burden on the industry creating the most hazards.’’ 11. In 1993, the Clinton administration proposed an $8.1 billion tax on insurance and chemical companies to pay for the cleanup of the 1,300 worst Superfund sites. In return, the government would have ended attempts to recover the cleanup costs through tort suits, but only for those sites. A.M. Best, an insurance rating company, estimated that the $8.1 billion was only a downpayment on a total environmental liability of $255 billion. In contrast, the total capital of the property and casualty industry was only $180 billion. Republican opposition prevented passage in both the House and the Senate (Quint 1994). 12. Landes and Posner, however, might contend that chemicals are risky products. Any action that raises their prices reduces demand and prevents some consumers from suffering harm, thus enhancing efficiency (Landes and Posner 1987, 296). But, again, this argument refers to present and future harms rather than past harms.

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93

Index Abelson, Philip H., 15 Abraham, Kenneth, 63 Accidents, bilateral and unilateral, 28–30 Adverse selection effect of capital market inefficiencies on, 63 insurance company strategies to reduce, 60 in private insurance markets, 59 Ames, Bruce N., 15–16, 20, 21 Animal tests critique of current programs, 15–17 defense of, 17, 20 effects of exposure to chemicals, 14–22, 67–68 Bacteria tests, 22 Bailar, John C., 13 Bailer, A. John, 21 Bennet, James, 43 Bernstein, Leslie, 21 Brennan, Troyen A., 31 Broome, John, 47 Bureaucracy See Regulatory agencies. Business firms costs of residual risks assigned to, 35 investment in optimal damage prevention, 33 Byrd, Daniel M. III, 25 Calfee, John E., 36 Cancer background incidence of, 22–23 rates as artifact in animal tests, 15 regulation of risks related to, 53 trends in rates of human, 12–13 Carcinogenic Potency Database (CPDB), 14–16 Carcinogens carcinogenicity as artifact in animal test results, 15 differences in human and animal, 20 hazards of various substances, 16–17 regulation of, 53

Case-control studies limitations of, 11 medical school preferences for, 10 retrospective, 10 unobserved differences between experimental and control groups, 13 Chemicals liability rules for, 36–37, 40–41 requirements to clean up disposal sites, 63 as sources of background cancer incidence, 22–23 used in bacteria studies, 22 See also Exposure to chemicals. Choices under command-and-control regulations, 69–70 optimal, 75n1 See also Value choices. Class-action suits effectiveness of torts, 71 to resolve exposure torts, 54, 56 Club goods air and water quality as, 83n2 Coase, Ronald H., 28, 35, 45, 48, 50 Coase theorem conditions for failure of, 50–51 contractual solution under, 28 Cogliano, Vincent James, 17 Commodities as public goods, 83n1 Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), 63–65 See also Superfund. Convenience-cohort studies limitations of, 11 unobserved differences between experimental and control groups, 13 used by epidemiologists, 10–11 Costs to develop knowledge, 42–43 of EPA regulation, 52–54, 71 of information gathering, 42–43

95

INDEX under no-liability regime, 37, 41 of pollution reduction, 38–40 of residual risks, 35, 59 See also Transaction costs. Courts decisions related to chemical disposal site claims, 63–64 interpretation of chemical torts, 32–33 types of liability cases heard by, 70 unpredictability of judgments, 73 use of information, 31–32 CPDB See Carcinogenic Potency Database (CPDB). Crandall, Robert W., 37, 52 Cropper, Maureen L., 53 Cross, Frank B., 25 Crouch, Edmund A. C., 12 Cummins, J. David, 61 Cushman, John H., Jr., 1 Danzon, Patricia, 30, 31, 36 Data Carcinogenic Potency Database (CPDB), 14–15 on effects of specific substances, 12 use of animal data in regulatory judgments, 15 Davis, Devra Lee, 13, 20 Day, Nicholas, 6 Demand revelation, 49 DeParle, Jason, 45 Detection bias in case-control and conveniencecohort studies, 11 conditions for, 13 Dewees, Donald, 34 Disease incidence in case-control and conveniencecohort studies, 10–11 Doll, Richard, 12–13, 20, 23 Douglas, Mary, 16 Drug trials, 10 Eisenberg, Theodore, 55 Emissions lack of variation under commandand-control regulation, 71 property rights for, 48 Emissions rights allow trade gains, 56 under Clean Air Act amendments (1990), 83n7 free-rider problem with, 72 market for, 47–51

96

regulation as imitator of market for, 52 superior to regulation, 72 trading of, 50–51 transparent and neutral, 48 Ennever, Fanny K., 12 Environmental Protection Agency (EPA) calculation of human exposure to chemicals, 17 costs and benefits of regulation by, 52–54, 71 requirements under CERCLA, 63 sources of funds for chemical cleanup, 63 studies of actual human exposure, 17 valuation of risk reduction, 71 See also Superfund. Epstein, Richard A., 36 Ethanol, 16 Ethylene dibromide (EDB), 16 Experience rating, 60 Exposure to chemicals animal tests for, 14–22 bacteria tests for, 22 with command-and-control regulation, 71 cost of reducing, 59 courts’ use and interpretation of information about, 31–33 health effects of low-level, 67 human studies about, 10–14 market provision of information about, 68 as private and public goods, 46–47, 70 private goods as risks to, 2 public, 47 public goods as risks, 2 regulation to limit, 56–57 residual, 2 role of class-action torts to limit, 57 sources of human, 17–19, 23–24 using animal data in regulatory judgments about, 15 See also Animal tests; Human studies. Feinstein, Alvan R., 11, 37 Ferebee v. Chevron, 32 Free-rider problem of simple torts, 54 solutions, 49–50 Gallo, Michael, 21 Gettinger, Stephen, 61

INDEX Gillette, Clayton P., 50, 51, 54 Gold, Lois Swirsky, 15-16, 20, 21 Green, Michael D., 8, 10, 32 Halpert, Julie Edelson, 1 Harrington, Scott E., 61, 62 Harvard Medical School Nurses Study, 11 Health effects of exposure to synthetic chemicals, 22–23 potential violation of Coase theorem related to, 50–51 Henderson, J. Vernon, 54 HERP index, 16 HERP values, 16, 18–19t Hester, Sheri T., 23 Hoel, David G., 21 Hoffman, F. Owen, 22 Hornstein, Donald T., 50, 51, 54 Huber, Peter, 30, 32, 63 Hughes, James W., 55, 56 Human studies case-control and convenience-cohort, 10–11 on chemicals and cancer, 12 to determine effects of chemical exposure, 67–68 drug trials, 10 Information acquired under no-liability regime, 42, 46 acquisition by regulatory agencies, 41–45 asymmetric, 29 developed and considered by tort system, 41–43 in experience rating data, 60 insurance company strategies to overcome problems of, 60 from markets about exposure to chemicals, 68–69 pooling of insurance-claims experience, 61 in private insurance markets, 59–60 related to radon risks, 25–26 uses by regulatory agencies, 69 Ingersoll, Bruce, 1 Institutions, liability, 54–56 Insurance companies formation of classes by product type, 36 formation of classes by risk to person using product, 36

pooled information antitrust exemption, 61 reluctance to manage residual exposure risk, 73 Insurance markets causes of failure in, 59–60 managing residual exposure risks, 72–73 transfer of risks in, 59 trends in general liability in, 61–62 See also Premiums, insurance. Interest rates effect on environmental insurance market, 73 effect on insurance prices, 62 Kaldor, John, 6 Kass, Edward H., 11 Kealey, Terence, 25 Kelly, Kathryn E., 1 Kenney, Jeannine, 1 Klein, Benjamin, 55 Klein, Daniel B., 25 Knowledge development and use, 42–43 Kocher, David C., 22 Krier, James E., 50, 51, 54 Landes, William M., 28, 29, 33, 35, 37 Latin, Howard, 8 Lave, Lester, 12, 25 Liability rules for chemicals, 40 critique of, 30–36 empirical and product specific optimality of, 37 limitations in managing risk, 69 no-liability regime, 37, 41, 42, 70 in product liability law, 37 as solution to transaction costs, 28–30 See also Negligence rule; No-liability regime; Strict liability rule Lyndon, Mary, 27 McCarran-Ferguson Act (1945), 61 McGee, Robert T., 61 McGinley, Laurie, 1 Magaw, Renae, 15–16 Markets provision of chemical exposure information, 25, 68–69 regulation as imitator of, 52 for risk information, 25–27 See also Insurance markets. Marshall, Eliot, 13 Marx, Jean, 14

97

INDEX Maximum tolerated dose (MTD), 14–15 Meier, Kristen A., 21 Moral hazard, 59–60 Mueller, Dennis, 49 National Research Council (NRC), 10, 33 National Toxicology Program, 22 Negligence rule application in unilateral accidents, 28–29 appropriate use of, 36 in bilateral accidents, 29–30 inefficiency of, 31 pools risk by customer, 36, 40–41 No-liability regime, 70 costs and damages under, 37, 41 information gathered under, 42, 46 Occupational Safety and Health Administration (OSHA), 52 Ott, Wayne R., 17 Outreville, J. Francois, 61 Passell, Peter, 1 Pease, William S., 53 Perera, Frederica, 17, 20 Peto, Richard, 12–13, 20, 23 Pollution bureaucratic regulation of, 50–52 conditions for optimal abatement, 39 marginal costs and benefits of reduction, 38–40 Portier, Christopher J., 21 Posner, Richard A., 28, 29, 33, 35, 37 Premiums, insurance correlation with real interest rates, 62 used to manage moral hazard and adverse selection, 60–61 Priest, George L., 30, 31, 36, 55 Private goods consumption of, 5 defined, 80n1 risks as, 75n3 some chemical exposures as, 46, 68 Product liability law, 37 Property rights in deciding pollution control issues, 50–52 equity conflicts about, 75n2 potential for retroactive alteration of, 73 Public goods commodities as, 83n1 demand for, 49

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qualities of, 75n4 some chemical exposures as, 47 Rall, David P., 17, 20 Regulation of behavior using information, 43–44 emissions control practices, 56–57 as imitator of market, 52 of public exposure in practice, 52–53 using animal data in judgments for, 15 Regulation, command-and-control to achieve efficient level of chemical exposure, 71 of pollution, 50–52 Regulatory agencies information acquisition by, 42–43 timing of information collection, 41–45 use of animal test data, 15 use of information, 69 uses of scientific information by, 69 Reinhold, Robert, 45 Ringleb, Alan H., 33 Risks costs of residual, 35, 59 developing and selling information about, 25–28 effect of changes in tort liability on average, 62–63 of exposure to chemicals, 59 information dissemination by markets about, 25–26 insurance company formation of classes by, 36 insurance market management of residual, 72–73 related to lifetime exposure to chemicals, 23 risk-sharing pools by product, 34–35 transfer to insurance companies, 59 Roberts, John W., 17 Robinson, Glen O., 33 Rothbard, Murray N., 37 Samuelson, Paul A., 47 Schwartz, Alan, 34 Selection bias in case-control and conveniencecohort studies, 11 conditions for, 13 Self-insurance, 63 Shapiro, Samuel, 11 Shavell, Steven, 25, 27, 29, 30, 33, 59 Smith, Elaine M., 13

INDEX Smith, Michael L., 62 Snyder, Edward A., 55, 56 Spence, A. Michael, 37 Statistical inference confidence levels, 5–6 probabilistic error, 6–10 related to animal testing, 20–22 Strict liability with asymmetric information, 29 effect of imposing, 34 potential problems of, 34–36 in unilateral and bilateral accidents, 28–29 Strict liability rule conditions for efficiency of, 36 with contributory negligence, 28–29, 37 inefficiency of, 31 injurers’ responsibility for damages, 28 pools risk by product, 36, 40–41 potential problems of, 34–36 retroactive in Superfund law, 73 Superfund backward-looking perspective of, 2, 73 judgments requiring payment by insurance companies, 64 sources of cleanup funds, 63 TCE at sites identified under, 15 use of retroactive strict liability in, 73 TCE See Trichlorethylene (TCE). TD50, 16, 21 Tennant, Raymond W., 22 Thurow, Lester, 27 Tort Policy Working Group, 62 Torts court interpretation in chemical, 32–33

effect on industry structure, 33–34 free-rider problem of simple, 54 as response to public chemical exposure, 71–72 role of class-action torts, 57 Tort system changes in interpretation of liability, 62–63 role in consumption of public goods, 54–56 timing of information gathering, 41–42 use of knowledge and information, 42–43 See also Liability rules. Transaction costs associated with risk-information market, 34 evaluating torts as response to, 36 Travis, Curtis C., 23, 53 Trichlorethylene (TCE), 15 Tumorigenic potency (TI), 21 Value choices information to make, 68–69 selecting among inefficiencies, 37–40 Viscusi, W. Kip, 47, 53, 55 Wallace, Lance, 17 Wartenberg, Daniel, 21 Weinstein, I. Bernard, 17, 20 Weitzman, Martin L., 37 Wiggins, Steven N., 33 Wildavsky, Aaron, 16 Willingness to pay, 54 Wilson, Richard, 12 Wines, Michael, 61 Winston, Clifford, 36 Winter, Ralph A., 62 Wittman, Donald, 55 Zeise, Lauren, 12

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