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CEIC-06-07

"Planning for Natural Disasters in a Stochastic World"

Lester B. Lave and Jay Apt

Abstract:
We examine the risks of natural disasters, such as hurricanes, floods, and earthquakes to find the optimal public reaction, including structures to control the disaster (such as dams and levees) and evacuation. Protection of life should be handled by warning and evacuation leaving property protection to be optimized via benefit-cost analysis. Mandatory insurance can both inform people of the risks and stop them from claiming public funds to compensate them from natural disaster losses. A high level of protective structures is warranted in areas at high risk of natural disasters, but the cost of these structures should be borne locally.

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