Frontiers of Environmental Economics
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Frontiers of Environmental Economics

Edited by Henk Folmer, H. Landis Gabel, Shelby Gerking and Adam Rose

Top European and American scholars contribute to this cutting-edge volume on little-researched areas of environmental and resource economics. Topics include spatial economics, poverty and development, experimental economics, large-scale risk and its management, organizational economics, technological innovation and diffusion and many more.
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Chapter 12: Strategies for dealing with large-scale natural and environmental risks

Howard Kunreuther


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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