Major Disasters and the Good Samaritan Problem-BECKER
Although the death toll from Hurricane Katrina is not yet known, the loss in life and property makes this one of the worst natural disasters in American history. Coming less than a year after the Great Tsunami that killed about 300,000 people in Asia, this experience has many wondering whether the world is facing much more erratic and violent weather, possibly due to global warming.
I do not know the answer to this question, but important public policy issues are raised by major disasters, even if they will not increase in severity over time. One major question is whether individuals, companies and local governments have the right incentives when they determine where to locate plants, oil drilling rigs, refineries, factories, homes, roads, levees, and bridges.
Location decisions would be optimal if those making these decisions had to bear the full social cost of any damages to their property and person from a disaster. Under these conditions, greater insurance premiums in areas that are prone to hurricanes, earthquakes, tsunamis, and other disasters would reflect the greater risk to life and property in these areas. The expected loss for those not insuring would rise in proportion to the greater risk. People, companies, and governments would then build homes, roads, businesses, and the like in disaster-prone regions only if the benefits exceeded the full risk of damages.
However, generous private and public help to victims of terrible disasters, while highly desirable, distort such rational calculations. Congress just voted over $10 billion of relief help to victims of Katrina, the Red Cross and other private groups have already had pledges of over $200 million of private help, other nations have offered generous assistance, and the United States has the Federal Emergency Management Agency that provides substantial assistance to people and businesses in areas that are declared to be disasters. Presidents are making greater and greater use of this Act to declare regions in need of emergency assistance.
Such public and private assistance in the event of disasters make it more likely for persons, companies, and public activities to locate in high-risk areas because they will often be spared much of the losses. They also may not take out insurance against risks that would inflict large losses; for example, rather few New Orleans homeowners had flood insurance. Studies have shown a small propensity to insure against low probability natural disasters that cause great damage- see "Paying the Price: The status and Role of Insurance Against Natural Disasters In the U.S.", Ed. by Kunreuter and Roth). So private and public generosity to victims of disasters help distort many pre-disaster decisions.
This distortion goes under the name of the "Good Samaritan" paradox in philosophy and economics. To illustrate this problem, consider the behavior of loving parents toward their children. Such parents would come to the assistance of their children if they get into financial trouble, have serious medical problems, or experience other difficulties. At the same time, they want their children to use their money wisely, work and study hard, prepare for future contingencies, and lead healthy life, so that they can avoid personal disasters.
Unfortunately for the parents, children can distinguish reality from lectures, and threats that will not be backed up by parental behavior. If they anticipate that their parents will help them out if they get into trouble, and if they are not so altruist to their parents, they would consume and possibly gamble excessively, and they might quit good jobs to "find themselves". Parents might then be indirectly encouraging the very behavior by their children that they want them to avoid.
The federal government and private philanthropy are in a similar Good Samaritan situation with respect to families, businesses, and local governments that build where there is likely to be flooding, landslides, hurricanes, earthquakes, and other major natural disasters. The federal government and others may wish they did not build so much in these areas, and the government may hope for diversification elsewhere. Yet if the government's advise is ignored, and if there is terrible suffering from a disaster, all humane and politically sensitive governments and philanthropic organizations would help, even though they wish the victims had made more socially efficient decisions before disaster struck.
A particularly important location decision facing the U.S. is whether it should encourage a greater decentralization of its oil, refinery, and natural gas facilities. Katrina shut down about 1.5 million barrels of oil production, 16 per cent of American natural gas production, and about 10 per cent of U.S. refining capacity at a time when there is little slack in worldwide refining capacity, and the region‚Äôs electric and natural gas distribution system has also been knocked out. "Altogether, about 800 manned platforms, plus several thousand smaller unmanned platforms, feed their water and gas into 33,000 miles of underwater pipelines‚Ä¶" (Daniel Yergin, The Wall Street Journal, 9/2/05).
Much of the cost of this shutdown will be borne by the country as a whole, partly already reflected in the decision to release some of the 700 million barrels of oil in the Strategic Oil Reserve- the U.S. government has no gasoline reserves, although some other countries do have such reserves. The Gulf energy complex seems especially vulnerable not only to a future natural disaster, but also to well-planned terrorist attacks.
The ability to decentralize natural gas and to some extent also oil production is limited by the federal moratorium on natural gas and oil production in the Outer Continental Shelf. The recent energy bill includes requires a requirement to prepare an inventory of these reserves, and some effort is being made in Congress to relax the moratorium. The damage from Katrina indicates that such steps are more urgent than they appeared even a few weeks earlier.
Can anything generally be done to weaken before disasters strike the inefficient incentives caused by the natural and laudable tendency of governments to help the victims of terrible disasters? To start, it would help to have tougher zoning restrictions in disaster-prone areas to reduce construction and raise their capacity to withstand major shocks. These restrictions would apply, for example, to areas subject to bad flooding, perhaps because buildings and roads would be below sea level, as in New Orleans, and to buildings on large faults that are particularly subject to earthquake damage. After the great destruction caused by the 1989 California earthquake, that state toughened its building code to make it more likely that buildings could survive major earthquakes. Perhaps they did not toughen them enough since California can expect a large amount of federal assistance once again in the event of a future serious earthquake. Asian nations have restricted rebuilding in some areas devastated by the Great Tsunami.
In addition, anyone who does build in designated high-risk areas should be required to carry insurance that covers most of their losses, the way many states mandate liability car insurance. This requirement would place the bulk of the cost of damages on the individuals and businesses that locate in risky areas, and the companies that insure them. Provisions have to be made for persons considered too poor to have adequate insurance, and insurance companies would need to have sufficient resources in the event a major disaster strikes. Many states already require insurance companies to have minimum levels of liquid capital.
Given the need to help victims of disasters, there is no perfect way to induce individuals, businesses, and local governments to incorporate more fully into their decisions the risks of living and building in disaster-prone areas. But more can be done, and Katrina proved that despite 9/11, the U.S. is still terribly ill prepared to handle a major disaster. It is scary to contemplate how well the country would respond to even greater disasters, such as one induced by a future and even more deadly terrorist attack.