How economists think about victims of natural disasters

 [[{“value”:”That is the topic of my latest Bloomberg column, here is one excerpt: First, whenever possible it is better to use private insurance, such as homeowner’s insurance and flood insurance, to protect against loss. One of the functions of insurance is to make losers at least partially whole after the fact, but another is to
The post How economists think about victims of natural disasters appeared first on Marginal REVOLUTION.”}]] 

That is the topic of my latest Bloomberg column, here is one excerpt:

First, whenever possible it is better to use private insurance, such as homeowner’s insurance and flood insurance, to protect against loss. One of the functions of insurance is to make losers at least partially whole after the fact, but another is to make risky decisions too expensive to contemplate in the first place.

This second function of insurance is especially important for Florida. The state is vulnerable to storms, so market prices for insurance should be allowed to adjust to higher levels, most of all for vulnerable properties. High prices in an area are a sign that building and renovation should not take place there. With fewer people living in vulnerable areas, the cost of storms will fall accordingly.

That sounds harsh, but “incentives matter” is the first and primary principle of economics, and sometimes incentives should be allowed to operate. Unfortunately, Florida has a state-run insurer of last resort which continues to bail out homeowners.

Political debates tend to frame this issue as whether to help poor, struggling homeowners. And indeed they may well suffer some terrifying losses because of storms. But whatever you think of such bailouts after the fact, with better incentives ahead of time, that issue will come up less often.

Economists are better at ex ante institutional design than at adjudicating all claims on the public purse ex post.

Advice that is not always heeded.

The post How economists think about victims of natural disasters appeared first on Marginal REVOLUTION.

 Current Affairs, Economics, Law, Uncategorized 


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