Working Paper: NBER ID: w20215
Authors: Ian W.R. Martin; Robert S. Pindyck
Abstract: How should we evaluate public policies or projects to avert, or reduce the likelihood of, a catastrophic event? Examples might include inspection and surveillance programs to avert nuclear terrorism, investments in vaccine technologies to help respond to a "mega-virus," or the construction of levees to avert major flooding. A policy to avert a particular catastrophe considered in isolation might be evaluated in a cost-benefit framework. But because society faces multiple potential catastrophes, simple cost-benefit analysis breaks down: Even if the benefit of averting each one exceeds the cost, we should not necessarily avert all of them. We explore the policy interdependence of catastrophic events, and show that considering these events in isolation can lead to policies that are far from optimal. We develop a rule for determining which events should be averted and which should not.
Keywords: No keywords provided
JEL Codes: D81; H56; Q54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| background risks from other potential catastrophes (H84) | WTP for averting a specific catastrophe (H84) |
| presence of multiple risks (D81) | expected future consumption (D15) |
| reduced expected future consumption (E21) | marginal utility of consumption (D11) |
| increased marginal utility of consumption (D11) | benefits associated with averting the primary catastrophe (H84) |
| facing multiple catastrophic threats (H12) | optimal policy (C61) |
| conventional analyses (D79) | aggregate effects of large projects on total consumption and welfare (E20) |
| presence of smaller catastrophes (H84) | decision to avert larger catastrophes (H12) |
| projects with positive net benefits (H43) | significant reductions in overall consumption (D12) |