Welfare Costs of Catastrophes: Lost Consumption and Lost Lives

Ian Martin and Robert Pindyck

No 26068, NBER Working Papers from National Bureau of Economic Research, Inc

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 wealth or 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.

JEL-codes: D81 H5 Q5 Q58 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-env and nep-hea
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Published as Ian W R Martin & Robert S Pindyck, 2021. "Welfare Costs of Catastrophes: Lost Consumption and Lost Lives," The Economic Journal, vol 131(634), pages 946-969.

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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 (2020)
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