The Economic Consequences of a Catastrophic Earthquake Proceedings of a Forum (1992) / Chapter Skim
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4 DIFFERENTIAL IMPACT OF EARTHQUAKE EVENTS
4 DIFFERENTIAL IMPACT OF EARTHQUAKE EVENTS
Pages 112-127
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From page 112... ...
PRESENTATION OF ANTHONY M YEZER Unfortunately, there has been relatively little research on the topic of economic effects of serious earthquakes by economists.
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From page 113... ...
Special problems arise in connection with infrequent and very uncertain events such as serious earthquakes. It is then possible to conduct exercises in which the regional economy responds to disaster events.
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From page 114... ...
A major econometric study of a large national cross section of disaster events occurring during the 1960-1970 period, 44found no long-term effects of disasters on population or housing trends. While this study has been criticized for using only population and housing units as indicators, the theoretical analysis conducted here suggests that population and housing changes could be appropriate indicators of local effects of disasters if the proper tests were performed.
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From page 115... ...
Specifically, experience of a serious earthquake may cause firms to lower their expected returns to plant and equipment investment and workers to lower expected real wages, so that capital and labor are encouraged to locate outside the city. A detailed analysis of a general-equilibrium model of a city subject to natural-ha~rd risks is presented in The Local Economic Effects of Natural Disasters.48 Wade there are many implications of such models, among the most interesting and relevant for the discussion of serious earthquakes are the following.
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From page 116... ...
Expectations and Economic Effects of Disasters The primary factor generating long-run effects of a serious earthquake is the change in expectations of future returns to capital investment and real wages of labor in the region. Simple announcement of a significant increase in earthquake hazards can have expectations effects as well.
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From page 117... ...
The long-run effects calculated as a consequence of unanticipated disasters were far larger than estimates of immediate damage from these events.45 Problems in Predicting Earthquake Effects The expectations approach to earthquake hazards suggests that the longrun effects of a particular serious earthquake event may be very substantial. However, these effects depend on prior expectations and the way in which expectations are updated as a result of the event.
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From page 118... ...
There are three areas that need to be covered: (1) the set of lossmitigation measures for reducing quake losses; (23 preliminary results from an interactive mitigation model that the Wharton Risk and Decision Processes Center has undertaken for the Federal Emergency Management Agency (FEMA)
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From page 119... ...
If the benefit-cost ratio is greater than 1, in this case, the mitigation measure is an attractive one. On the other hand, suppose you utilize a zero discount rate over a 50year period and you take into account secondary losses.
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From page 120... ...
It is recognized with mitigation measures that cost is borne once and benefits accrue over time. Immediate costs can be focused on, so if asked whether one wants to adopt a mitigation measure or not, one would say this measure will cost me $500.
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Two different cases present some qualitative results: · In the first case everything is accurately estimated. The probability is accurately estimated by the individual, and the question is, what is the benefit of taking out mitigation measures or not taking out mitigation measures?
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From page 122... ...
Do you find they behave more rationally when it comes to material th~ngs -- such as a house, a car, physical damage -- and less rationally when it becomes their perception of personal risk? I think of this in relation to the nuclear power debate, where the material risks are relatively negligible but the personal, perceived risks are enormous.
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From page 123... ...
What should come out in any analysis is, that a public building has lots of secondary impacts, and there are lots of benefits when all of those things are examined. In most cases, mitigation measures probably will be very beneficial.
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From page 124... ...
But even 1 or 2 percent of $50 billion in land values in the Bay Area is a nice piece of change. As a matter of fact, using the sort of approach I have advocated, you get much bigger effects of unanticipated disasters than you would ever get by counting the buildings that actually fall down.
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From page 125... ...
As I understand it, the indicator in your model is changes in the values of land. If that is so, then how would you explain that around 25 years ago, when identification of the earthquake threat significantly increased, there was a trend of increasing land values in Los Angeles, San Francisco, and Tokyo, which are the highest land values in the world?
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From page 126... ...
Transaction costs of enforcing mitigation measures is an important issue. Who pays for this?
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From page 127... ...
DIFFERENTIAL IMPACT 127 building safer? How can the effectiveness of mitigation expenditures be assessed?
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