Edited by Henk Folmer, H. Landis Gabel, Shelby Gerking and Adam Rose
Chapter 12: Strategies for dealing with large-scale natural and environmental risks
Howard Kunreuther 1 INTRODUCTION What alternative strategies are appropriate for reducing losses and providing protection against natural and environmental hazards which can create potentially catastrophic losses to individuals, ﬁrms and society? New scientiﬁc knowledge and recent developments in information technology offer the possibility of estimating the risks of these hazards more precisely than in the past and utilizing these data for developing more effective programmes for coping with losses from these events. This chapter emphasizes the importance of combining market mechanisms such as incentives and insurance with regulations and standards (for example building codes) in developing risk management strategies for natural and environmental risks. Particular attention will be given to the challenges and opportunities of utilizing beneﬁt–cost analysis in the evaluation process. The next section contrasts normative and descriptive choice behaviour by individuals and managers regarding low-probability events. To illustrate these concepts, I focus on the speciﬁc example of reducing losses and providing protection against natural hazards. The concluding section of the chapter proposes ways of extending beneﬁt–cost analysis to incorporate behavioural factors that inﬂuence people’s choice processes. 2 NORMATIVE MODELS AND DESCRIPTIVE FEATURES OF CHOICE Consider the following questions that face individuals, ﬁrms and society today with respect to investing in measures to reduce losses from environmental and natural hazards: ● Can one reduce the consequences from catastrophic accidents to a ﬁrm by purchasing insurance and/or investing in some risk-reducing meas293 294 Frontiers of environmental economics ● ● ures? Section 112R of the Clean Air...
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