Banning a Risky Product Cannot Improve Any Consumer ' s Welfare ( Properly Understood ) , with Applications to FDA Testing Requirements

eoclassical welfare economists maintain that consumers suf-N fer when risky goods are supplied in a n unregulated market. Consumers a r e said to possess imperfect information (Stiglitz 1988, pp. 78-79; Barr 1992, pp. 749-50) and limited ability to process complex information. Moreover, because information is presumed to be a public good, markets are ipso facto supposed to produce and disseminate a suboptimal amount of information Under these conditions, neoclassical welfare economists maintain, consumers make choices that cause them to be worse off than they would be, say, if a regulator constrained their choices by banning very risky products from the market. The alleged market failure may stem from outright consumer ignorance, but it occurs even if consumers conduct what seems to them an optimal search for information. Given their inability to process complex information and the public-good problem with respect to information, inefficient risk bearing occurs (Greer 1993, pp. 413-14), a s consumers bear more risk than they would choose to bear if they could process all information flawlessly and the public-good problem with respect to information creation and dissemination had been solved. Some analysts have noted, however, that U.S. regulatory agencies *Robert Higgs is visiting professor of economics a t the Albers School of Business and Economics a t Seattle University. For comments on a previous draft, my thanks go to Don Boudreaux, Randy Holcombe, Murray Rothbard, Andy Rutten, and anonymous referees, one ofwhom made especially detailed and constructive remarks.