Welfare costs of catastrophes: lost consumption and lost lives

Ian Martin and Robert Pindyck

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Most of the literature on the economics of catastrophes assumes that such events cause a reduction in the stream of consumption, as opposed to widespread fatalities. Here we show how to incorporate death in a model of catastrophe avoidance, and how a catastrophic loss of life can be expressed as a welfare-equivalent drop in consumption. We examine how potential fatalities affect the policy interdependence of catastrophic events and “willingness to pay” (WTP) to avoid them. Using estimates of the “value of a statistical life” (VSL), we find the WTP to avoid major pandemics, and show it is large (10% or more of annual consumption) and partly driven by the risk of macroeconomic contractions. Likewise, the risk of pandemics significantly increases the WTP to reduce consumption risk. Our work links the VSL and consumption disaster literatures.

Keywords: catastrophes; catastrophic events; macroeconomic contractions; disasters; fatalities; value of life; willingness to pay; pandemics (search for similar items in EconPapers)
JEL-codes: D81 Q50 Q54 (search for similar items in EconPapers)
Date: 2020-08-25
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Published in Economic Journal, 25, August, 2020. ISSN: 0013-0133

Downloads: (external link)
http://eprints.lse.ac.uk/106200/ Open access version. (application/pdf)

Related works:
Journal Article: Welfare Costs of Catastrophes: Lost Consumption and Lost Lives (2021)
Working Paper: Welfare Costs of Catastrophes: Lost Consumption and Lost Lives (2020)
Working Paper: Welfare Costs of Catastrophes: Lost Consumption and Lost Lives (2020)
Working Paper: Welfare Costs of Catastrophes: Lost Consumption and Lost Lives (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:106200

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