DP10730 Averting Catastrophes: The Strange Economics of Scylla and Charybdis

Author(s): Ian Martin, Robert Pindyck
Publication Date: July 2015
Keyword(s): bioterrorism, catastrophes, catastrophic events, climate change, disasters, epidemics, nuclear terrorism, pandemics, policy objectives, willingness to pay
JEL(s): D81, Q5, Q54
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10730

Faced with numerous potential catastrophes---nuclear and bioterrorism, mega-viruses, climate change, and others---which should society attempt to avert? A policy to avert one catastrophe considered in isolation might be evaluated in cost-benefit terms. But because society faces multiple catastrophes, simple cost-benefit analysis fails: Even if the benefit of averting each one exceeds the cost, we should not necessarily avert them all. We explore the policy interdependence of catastrophic events, and develop a rule for determining which catastrophes should be averted and which should not.