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Welfare Costs of Catastrophes: Lost Consumption and Lost Lives

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  • Ian W R Martin
  • Robert S Pindyck

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 that 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.

Suggested Citation

  • Ian W R Martin & Robert S Pindyck, 2021. "Welfare Costs of Catastrophes: Lost Consumption and Lost Lives," The Economic Journal, Royal Economic Society, vol. 131(634), pages 946-969.
    • Handle: RePEc:oup:econjl:v:131:y:2021:i:634:p:946-969.
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    File URL: http://hdl.handle.net/10.1093/ej/ueaa099
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    Cited by:

    1. St-Amour, Pascal, 2024. "Valuing life over the life cycle," Journal of Health Economics, Elsevier, vol. 93(C).
    2. Peter A.G. van Bergeijk, 2021. "Pandemic Economics," Books, Edward Elgar Publishing, number 20401, June.
    3. Harrison Hong & Neng Wang & Jinqiang Yang, 2020. "Mitigating Disaster Risks in the Age of Climate Change," NBER Working Papers 27066, National Bureau of Economic Research, Inc.
    4. Robert S. Pindyck, 2020. "COVID-19 and the Welfare Effects of Reducing Contagion," NBER Working Papers 27121, National Bureau of Economic Research, Inc.
    5. Decerf, Benoit & Ferreira, Francisco H.G. & Mahler, Daniel G. & Sterck, Olivier, 2021. "Lives and livelihoods: Estimates of the global mortality and poverty effects of the Covid-19 pandemic," World Development, Elsevier, vol. 146(C).

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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