The Normative Economics of Social Risk

Abstract

AbstractSocial decisions in risky contexts raise a number of difficult questions. Should social decisions be more or less risk averse than the average person? Should we try to avoid large catastrophes more than frequent but limited harms with similar expected impact? Should social decisions be ambiguity-averse or stick to the expected-utility canon? This chapter reviews the normative economics of risk and uncertainty and examines possible answers to these questions, based on the pros and cons of utilitarianism, ex ante egalitarianism, and ex post egalitarianism. The divide between ex ante and ex post approaches reflects a deep trade-off between rationality (embodied in the key properties of the expected utility approach), respect for individual risk attitudes (embodied in the ex ante Pareto principle), and priority for the worse off (or aversion to inequality).