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Addressing Catastrophic Risks: Disparate Anatomies Require Tailored Therapies

Author

Listed:
  • Viscusi, W. Kip

    (Vanderbilt University)

  • Zeckhauser, Richard J.

    (Harvard University)

Abstract

Catastrophic risks differ in terms of their natural or human origins, their possible amplification by human behaviors, and the relationships between those who create the risks and those who suffer the losses. Given their disparate anatomies, catastrophic risks generally require tailored therapies, with each prescribed therapy employing a specific portfolio of policy strategies. Given that catastrophic risks occur rarely, and impose extreme losses, traditional mechanisms for controlling risks--bargaining, regulation, liability--often function poorly. Commons catastrophes arise when a group of actors collectively impose such risks on themselves. When the commons is balanced, that is, when the parties are roughly symmetrically situated, a range of regulatory mechanisms can perform well. However, unbalanced commons--such as exist with climate change--will challenge any control mechanism with the disparate parties putting forth proposals to limit their own burdens. When humans impose catastrophic risks predominantly on others--as with deepwater oil spills--the risks are external. For those risks, the analysis shows, a single responsible party should be identified. Primary emphasis should then be placed on a two-tier liability system. Parties engaged in activities posing such catastrophic risks would be subject to substantial minimum financial requirements, strict liability for all damages, and a risk-based tax for expected losses that would exceed the responsible party's ability to pay. Utilizing the financial incentives of this two-tier liability system would decrease the current reliance on regulatory policy, and would alter the role of regulators with a tilt toward financial oversight efforts and away from direct control. Catastrophic risks will always be with us. But as rare, extreme events, society has little experience with them, and current mechanisms are poorly designed to control them. Only a tailored therapy approach offers promise of significant improvement.

Suggested Citation

  • Viscusi, W. Kip & Zeckhauser, Richard J., 2011. "Addressing Catastrophic Risks: Disparate Anatomies Require Tailored Therapies," Working Paper Series rwp11-045, Harvard University, John F. Kennedy School of Government.
    • Handle: RePEc:ecl:harjfk:rwp11-045
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    References listed on IDEAS

    as
    1. Viscusi, W Kip, 1988. "Product Liability and Regulation: Establishing the Appropriate Institutional Division of Labor," American Economic Review, American Economic Association, vol. 78(2), pages 300-304, May.
    2. Viscusi, W. Kip & Zeckhauser, Richard J., 2011. "Deterring and Compensating Oil Spill Catastrophes: The Need for Strict and Two-Tier Liability," Working Paper Series rwp11-025, Harvard University, John F. Kennedy School of Government.
    3. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    4. Alan Berger & Case Brown & Carolyn Kousky & Richard Zeckhauser, 2011. "The Challenge of Degraded Environments: How Common Biases Impair Effective Policy," Risk Analysis, John Wiley & Sons, vol. 31(9), pages 1423-1433, September.
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    Cited by:

    1. Raghav Gaiha1 & Kenneth Hill & Ganesh Thapa, 2012. "Have Natural Disasters Become Deadlier?," ASARC Working Papers 2012-03, The Australian National University, Australia South Asia Research Centre.
    2. Gabel Taggart, 2023. "Taking stock of systems for organizing existential and global catastrophic risks: Implications for policy," Global Policy, London School of Economics and Political Science, vol. 14(3), pages 489-499, June.
    3. Raghav Gaiha & Kenneth Hill & Ganesh Thapa & Varsha S. Kulkarni, 2013. "Have natural disasters become deadlier?," Global Development Institute Working Paper Series 18113, GDI, The University of Manchester.

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    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H00 - Public Economics - - General - - - General
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law
    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General

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