Assessment of the Regional Economic Impacts of Catastrophic Events: CGE analysis of resource loss and behavioral effects of a RDD attack scenario
AbstractUsing a large-scale CGE model, we investigate the short-run and long-run regional economic consequences of a catastrophic event - attack via radiological dispersal device (RDD) - centered on the downtown Los Angeles area. We distinguish two main routes via which such a catastrophic event might affect regional economic activity: (i) reduction in effective resource supply (the resource loss effect) and (ii) shifts in the perceptions of economic agents (the behavioral effect). Broadly, the resource loss effect relates to the physical destructiveness of the event, while the behavioral effect relates to changes in fear and risk perception on the part of firms, households and government. Both affect the size of the regional economy. RDD detonation (Dirty Bomb) causes little direct capital damage and few casualties, but generates substantial short-run resource loss via business interruption. Changes in fear and risk perception increase the supply cost of resources to the affected region, while simultaneously reducing demand for goods produced in the region. In both the short-run and long-run in the affected region, households may require higher wages to work, investors may require higher returns to invest, and economic agents may switch their preferences away from goods produced. We show that because perception effects may have lingering long-term deleterious impacts on both the supply-cost of resources to a region and willingness to pay for regional output, they have the potential to generate changes in real regional GDP that are much greater than those generated by the resource loss effect. Implications for policy that might mitigate these effects are discussed.
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Bibliographic InfoPaper provided by Monash University, Centre of Policy Studies/IMPACT Centre in its series Centre of Policy Studies/IMPACT Centre Working Papers with number g-194.
Date of creation: Jan 2010
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RDD; economic impact; terrorism; risk perception;
Find related papers by JEL classification:
- H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
- R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-02-20 (All new papers)
- NEP-CMP-2010-02-20 (Computational Economics)
- NEP-GEO-2010-02-20 (Economic Geography)
- NEP-URE-2010-02-20 (Urban & Real Estate Economics)
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