A general rationale for a governmental role in the relief of large risks
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The government often provides relief against large risks, such as disasters. A simple, general rationale for this role of government is considered here that applies even when private contracting to share risks is not subject to market imperfections. Specifically, the optimal private sharing of large risks will not result in complete coverage against them. Hence, when such risks eventuate, the marginal utility to individuals of government relief may exceed the marginal value of public goods. Consequently, social welfare may be raised if the government reduces public goods expenditures and directs these freed resources toward individuals who have suffered losses.
KeywordsGovernment relief Large risks Insurance
JEL ClassificationsD6 D8 K2
I thank Peter Diamond, Georges Dionne, Kenneth Froot, Louis Kaplow, and A. Mitchell Polinsky for comments, Michael Belinsky and Jonathan Borowsky for research assistance, and the John M. Olin Center for Law, Economics, and Business at Harvard University for research support.
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