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Averting Catastrophes: The Strange Economics of Scylla and Charybdis

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  • Ian W.R. Martin
  • Robert S. Pindyck

Abstract

How should we evaluate public policies or projects to avert, or reduce the likelihood of, a catastrophic event? Examples might include inspection and surveillance programs to avert nuclear terrorism, investments in vaccine technologies to help respond to a "mega-virus," or the construction of levees to avert major flooding. A policy to avert a particular catastrophe considered in isolation might be evaluated in a cost-benefit framework. But because society faces multiple potential catastrophes, simple cost-benefit analysis breaks down: Even if the benefit of averting each one exceeds the cost, we should not necessarily avert all of them. We explore the policy interdependence of catastrophic events, and show that considering these events in isolation can lead to policies that are far from optimal. We develop a rule for determining which events should be averted and which should not.

Suggested Citation

  • Ian W.R. Martin & Robert S. Pindyck, 2014. "Averting Catastrophes: The Strange Economics of Scylla and Charybdis," NBER Working Papers 20215, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20215
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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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