Information Asymmetry, Moral Hazard, Safety-Critical Protections, and You.
Information Asymmetry, Moral Hazard, Safety-Critical Protections, and You.
Are environmental and safety regulators really protecting public interests?
Almost everyone lives within the envelope of possible harm posed by hazardous technologies. And, most of the time we don’t even realize it. Technologies like oil refineries, large chemical processing facilities, giant storage tanks, and electric power generating plants are obvious hazards. Less obvious are underground pipeline networks, semi-conductor fabrication operations, and wastewater treatment plants. There are countless hazardous technologies that operate within our living space. Even on remote farms and ranches, agriculture utilizes many hazardous chemicals that can become uncontained seeping into the general environment. In short, wherever people live, they bring with them hazardous technologies that provide convenience and livelihoods.
In fact, we are surrounded techno-hazards, and most of us know very little about what makes them hazardous.
Once aware that we are within an envelope of possible harm, we often ask ourselves, “Is it safe?” Of course, nothing is perfectly safe … so, a better question is , “Is it safe enough?”
The judgement that something is “safe enough” is always a matter of personal perspective and circumstance. For example, a well diversified energy investor living in London may perceive the BP Texas City Refinery is safe enough, whereas a resident of Texas City may feel the refinery is a life-threatening leviathan. Ultimately, government regulators make rules requiring safety-critical protections for most dangerous technologies. Government is responsible for ensuring that ordinary people (e.g., people having no claim to BP profits) are safe enough when within the envelope of possible harm.
Nearly always, profit seekers, government regulators, and ordinary citizens are in mutual disagreement as to whether or not a given hazardous technology is safe enough. On one hand profit seekers risk investment capital, while on the other hand people with no claim to profits stand to loose property and/or health should an industrial accident occur.
Government, through regulatory oversight, determines how these conflicting economic risks are to be shared.
Clearly, if profit seekers and the general public held the same appetite for risk, there would be no need for regulatory oversight of safety-critical protections. It follows that hazardous enterprises will seek to “shape” the public’s appetite for risk to better align with their own.
“Information asymmetry” provides hazardous enterprises a natural opportunity to shape public risk appetites. These enterprises hold in-depth technical expertise operating under the control of well-structured management. They are the foremost experts on the technologies they operate. Members of the general public, however, have no technical expertise or management infrastructure to inform them about their exposure to risk imposed by a neighboring hazardous enterprise.
This natural information asymmetry offers enterprises a profit opportunity through “moral hazard.”
In short, moral hazard is a circumstance where one party decides how much economic risk to take, while another party (without claim to profits) suffers economic consequences should things go badly. Obviously, when the general public has a thin understanding of imposed dangers, a hazardous enterprise has an opportunity to enhance profits by lowering protection costs.
In other words, information asymmetry facilitates moral hazard, and moral hazard offers hazardous enterprises a profit opportunity.
It is important to appreciate that government safety regulators are the principal arbitrators of conflicting risk appetite between enterprises and the general public. To this end, regulatory agencies employ technical experts who (in principle) ensure that there will be no information asymmetry between enterprise and government. Thus, safety regulators are the public’s primary defense against the consequences of moral hazard imposed by hazardous technologies.
Herein is the rub: To what degree are environmental and safety regulators immune from regulatory capture by the hazardous enterprises they regulate?
Environmental and safety regulation has been under assault for decades. Historically, the assault has played out in elections (politicians authorize and manage regulators) and in the courts (where the judiciary is appointed by politicians). More recently, marketing science is playing an important role in shaping public appetite for risk. Well executed narratives and pseudo-scientific disinformation are being pushed into mainstream, partisan, and social media. Risk appetite shaping through strategic marketing has been normalized into the body politic, where true science and engineering expertise is being replaced by political propaganda.
So concerning is the attack on science that should be guiding regulatory oversight that The Union of Concerned Scientist (UCS) published an expose entitled, The Disinformation Playbook: How Business Interests Deceive, Misinform, and Buy Influence at the Expense of Public Health and Safety. The UCS has also identified a long list of sophisticated and well-financed think tanks that publish reporting supporting environmental and safety deregulation (including The American Enterprise Institute, Americans for Prosperity, The American Legislative Exchange Council, the Department of Economics at Suffolk University and its Beacon Hill Institute, The Cato Institute, The Competitive Enterprise Institute, The Heartland Institute, The Heritage Foundation, The Institute for Energy Research, and The Manhattan Institute for Policy Research).
The marketing of science misinformation is a strategy specifically intended to create information asymmetry that in turn fosters shaping of public risk appetites that can be exploited as a moral hazard profit opportunity. While career environmental and safety regulators have historically fought misinformation, decades of political pressures promoting information asymmetry has taken its toll, and regulatory capture (often promoted as “business-friendly regulatory oversight”) continues to advance.
So, let the public beware: Regulatory agencies that once were the science and technology experts who defended information symmetry on behalf of the public are now under intense pressure to abandon that role.
Almost everyone is an involuntary stakeholder in hazardous enterprises that promote deregulation. As the effectiveness of regulators is increasingly compromised, it is necessary for ordinary individuals defend their own economic interests from being plundered through moral hazard profiteering. Information symmetry is the public’s best defensive resource, and the voting booth holds the most accessible levers protecting your economic interests. Getting the correct facts and then holding politicians accountable, when they pander to the financiers information asymmetry, is now more than ever, an individual responsibility.