Averting Catastrophes: The Strange Economics of Scylla and Charybdis

52 Pages Posted: 16 Jun 2014 Last revised: 27 Mar 2023

See all articles by Ian Martin

Ian Martin

London School of Economics & Political Science (LSE) - Department of Finance

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: June 2014

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

Martin, Ian W. R. and Pindyck, Robert S., Averting Catastrophes: The Strange Economics of Scylla and Charybdis (June 2014). NBER Working Paper No. w20215, Available at SSRN: https://ssrn.com/abstract=2450915

Ian W. R. Martin

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

HOME PAGE: http://personal.lse.ac.uk/martiniw/

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02139
United States
617-253-6641 (Phone)
617-258-6855 (Fax)

HOME PAGE: http://web.mit.edu/rpindyck/www/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org

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