Averting Catastrophes: The Strange Economics of Scylla and Charybdis

Ian Martin and Robert Pindyck

No 20215, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D81 H56 Q54 (search for similar items in EconPapers)
Date: 2014-06
New Economics Papers: this item is included in nep-ene and nep-reg
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Published as Ian W. R. Martin & Robert S. Pindyck, 2015. "Averting Catastrophes: The Strange Economics of Scylla and Charybdis," American Economic Review, American Economic Association, vol. 105(10), pages 2947-85, October.

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Journal Article: Averting Catastrophes: The Strange Economics of Scylla and Charybdis (2015)
Working Paper: Averting Catastrophes: The Strange Economics of Scylla and Charybdis (2015)
Working Paper: Averting catastrophes: the strange economics of Scylla and Charybdis (2015)
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