Marketable risk permits for natural disaster mitigation
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Building codes are important for natural disaster mitigation. Typical public policy approach to building safety is the ‘command-and-control’ mechanism. Local government sets minimum standards that every new building must attain. Because a proposed change in the requirements is stated in terms of additional safety, the marginal cost would be different for each building. Those with high marginal cost are over-represented in the deliberations because for these buildings the cost is highly salient. Thus, many good proposals are defeated, and no buildings are made safer. The ‘marketable risk permits’ approach uses a market mechanism to encourage efficient safety upgrade. The building code would have two levels of safety, the lower level corresponding to the status quo. Each new building would be endowed with a quantity of risk permits. Developers who construct to the lower code level must purchase additional risk permits. Developers who build to the higher code level could sell their risk permits. Thus, for the few buildings for which the higher code level is expensive, developers could avoid high costs by purchasing risk permits instead. Government policy would determine the endowment of risk permits, as a fraction of total risk-reduction potential of the higher code level. The market would determine the price of risk permits, as well as which buildings get constructed to the higher code level. Under a risk permit policy, the marginal cost of safety would be considerably less than under a command-control policy. In situations where corruption already operates as a mechanism for providing relief to developers with high costs, a risk permit policy has little effect on the number of bribes, but the interaction drives down the price of both bribes and risk permits.
Key WordsBuilding codes market mechanism government regulation
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