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Optimal disaster-preventive expenditure in a dynamic and stochastic model

Takumi Motoyama (pge028mt@student.econ.osaka-u.ac.jp)
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Takumi Motoyama: Graduate School of Economics, Osaka University

No 15-03-Rev., Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: The purpose of this study is to present an analytical framework for publicly optimal disasterpreventive expenditure. We examine the optimal policy combination of tax rate, disaster-preventive expenditure, and productive government expenditure in a neoclassical growth model, in which natural disasters occur stochastically and partially destroy existing capital. Based on this model, we can decompose the welfare effect of raising preventive expenditure into three effects: the damage reduction, crowding out, and precautionary effects. By identifying these marginal benefits and costs, we obtain the policy conditions that maximize household welfare. Furthermore, we show that optimal prevention is increasing in disaster probability, and by using a numerical example, we show that there is an inverse U-shaped relationship between the expected growth rate and disaster probability.

Keywords: Natural disasters; Disaster-preventive expenditure; Optimal policy (search for similar items in EconPapers)
JEL-codes: E13 H4 Q54 Q58 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2015-04, Revised 2016-10
New Economics Papers: this item is included in nep-dge, nep-env and nep-mac
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