The Economics of Natural and Unnatural Disasters

Abstract

The recent extreme natural disaster events (the floods and cyclones in Australia and earthquakes in New Zealand and Japan) and associated policy responses must have many in the agricultural and resource economics profession thinking they might have something useful to say about how natural disasters could be managed. After all, the management of uncertain natural systems and associated markets is core business for the profession. However, researchers focused on rural issues may not be familiar with the literature on the economics of disasters as it focuses primarily on residential areas. The Economics of Natural and Unnatural Disasters is a collection of five papers with an introduction by the editor William Kern. For a relatively short book (143 pages), it does a good job of illustrating the diversity of research issues and angles covered by research on disaster economics in the last few decades. In terms of subject matter, it is predominantly United States-based and focused on natural disasters: flooding, hurricanes and tornadoes, but touches on climate change and on man-made disasters such as terrorism. William Kern’s introduction identifies some of the enduring themes of disaster research including understanding what influences how well people prepare and respond to disasters, how to evaluate disasters and disaster management, and the design of government policy. Chapter 2 (by Howard Kunreuther and Erwann Michel-Kerjan) provides the introductory story: worldwide, there have been multiple disasters in the last decade, where the loss of human live can be measured in hundreds of thousands. Damage costs from disasters have grown dramatically in recent decades and are often measured in hundreds of billions of dollars per year and tens of billions of dollars per event. Much of this increase can be attributed to increasing concentration of human population and value of property. It is debated whether things are getting worse with climate change and whether much of the damage may be preventable. After setting the scene, chapter 2 moves on to argue for the merits of long-term insurance contracts. The analysis illustrates the importance of imperfections in human decisionmaking about disaster management for policy design. However, the argument for long-term insurance is often not clearly laid out and as a result not convincing. The central theme of chapter 3 (by Anthony Yezer) is the importance of expectations about disasters. Because disasters are large and infrequent, they can change expectations, and this has numerous implications for policy. Along the way, the chapter provides a valuable synopsis of how the theory and practice of disaster policy in the US has progressed over time. A key theme is the importance of interactions between disasters and land markets. Urban land derives much of its value from features of the surrounding area, which can be changed by disasters. Yezer argues that these externality effects 144 Book reviews