Last year was one for the record books. In the U.S., a total of 14 weather and climate disasters each caused upwards of $1 billion in damages. The disasters killed 735 people.
A study as noted in this article examined man-made natural disaster losses between 1980 and 2011 and concluded that the losses in North America nearly quintupled in that period. The insured losses cost a spectacular $510 billion.
What caused the extreme weather conditions? There is no direct answer and the connection between climate change and extreme weather is debated. What’s science without controversy anyway? The escalating cost of these disasters can be attributed to government policies that encourage development in high-risk areas.
In Climatopolis, Matthew Kahn, writes that the anticipation of government protection proceeding a disaster creates incentives for builders to take perilous risks. He talks about the “tough love” policy advocated by Milton Friedman. The policy encourages people to move away from at-risk areas, or at least use better, sustainable building materials.
“Milton Friedman would offer no government money to rebuild damaged cities, a move that would short-circuit the current system,” Kahn writes. “Without any guarantee of government bailout, developers would have to think long and hard and really understand the risks they face before committing to building in a flood plain.”
Economist Gary Becker explains the concept in the “Good Samaritan” paradox:
Think about the behavior of loving parents toward their children. The parents are always there to help if their children need financial help. At the same time, parents want to teach their children about how to spend money wisely and to work and study hard. If the parents’ threats aren’t backed up with actual behavior, the kids will expect help whenever they find themselves in trouble. Becker writes, “parents might then be indirectly encouraging the very behavior by their children that they want them to avoid.”
It isn’t the most efficient use of the public’s tax dollars or of safety to promote development in high-risk disaster areas. In short, free insurance leads to bad location decisions.
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