Does the free market work when it comes to private-sector homeland security? That's the question put on the table in a new report by the Congressional Budget Office (CBO). The report does not answer the question but lays out the reasons why business might not at first provide adequate security and the ways in which the government might induce better behavior. For example, it notes that businesses only have the incentive to secure their own assets, not to protect society at large. "If the disparity between private costs and social costs is significant, the result is that private firms have insufficient incentive to meet social objectives," the paper says. Closing the gap between private and social interests may require tweaking national policies, according to the report, which discusses three broad strategies. One policy would establish new rules or incentives to force industry to face the full costs of possible losses. A second would use programs to "socialize the costs of security" by having the government and taxpayers implement or finance security measures for businesses. A third set of programs would educate the private sector with information on the risk of attacks, potential losses, and opportunities to mitigate losses. Consider an attack on a chemical-production facility that released toxins into the community. Programs that forced the company to bear the full cost of damage to the community might include imposing penalties for not meeting requirements.f the government were to bear the cost, a program might include rewarding industry for protecting vulnerable facilities or making them less dangerous by adopting safer production processes. The third approach might include warning residents of the dangers of an attack or informing the plant of ways to reduce vulnerabilities. The paper discusses potential policy initiatives for four private-sector industries: nuclear power, chemicals and hazardous materials, electricity, and food and agriculture.cbo_homelandsecurity0305.pdf