The economics of tsunami risk in a nutshell

Answers from the dismal science

The Becker-Posner blog has excellent posts on the economics of catastrophic risk. Here is an excerpt.

Nevertheless, it seems apparent that the total cost figure of the recent tsunami will come in at an amount great enough to indicate that there were indeed precautionary measures to take that would have been cost-justified.

Why, then, weren’t such measures taken in anticipation of a tsunami on the scale that occurred? Tsunamis are a common consequence of earthquakes, which themselves are common; and tsunamis can have other causes besides earthquakes—a major asteroid strike in an ocean would create a tsunami that would dwarf the Indian Ocean one.

There are a number of reasons for such neglect. First, although a once-in-a-century event is as likely to occur at the beginning of the century as at any other time, it is much less likely to occur in the first decade of the century than later. Politicians with limited terms of office and thus foreshortened political horizons are likely to discount low-risk disaster possibilities, since the risk of damage to their careers from failing to take precautionary measures is truncated. Second, to the extent that effective precautions require governmental action, the fact that government is a centralized system of control makes it difficult for officials to respond to the full spectrum of possible risks against which cost-justified measures might be taken. The officials, given the variety of matters to which they must attend, are likely to have a high threshold of attention below which risks are simply ignored. Third, where risks are regional or global rather than local, many national governments, especially in the poorer and smaller countries, may drag their heels in the hope of taking a free ride on the larger and richer countries. Knowing this, the latter countries may be reluctant to take precautionary measures and by doing so reward and thus encourage free riding. Fourth, countries are poor often because of weak, inefficient, or corrupt government, characteristics that may disable poor nations from taking cost-justified precautions. Fifth, people have difficulty thinking in terms of probabilities, especially very low probabilities, which they tend therefore to write off. This weakens political support for incurring the costs of taking precautionary measures against low-probability disasters.

The operation of some of these factors is illustrated by the refusal of the Pacific nations, which do have a tsunami warning system, to extend their system to the Indian Ocean prior to the recent catastrophe. Tsunamis are more common in the Pacific, and most of the Pacific nations do not abut on the Indian Ocean, but even if the risk of an Indian Ocean tsunami was only a tenth of that of a Pacific Ocean tsunami (a figure I have seen in a newspaper article), it was still worth taking precautions against; but there is a tendency to write down slight risks to zero. [Becker-Posner Blog]

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