A general rationale for a governmental role in the relief of large risks
- 370 Downloads
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.
- Arrow, K. J., & Lind, R. C. (1970). Uncertainty and the evaluation of public investment decisions. American Economic Review, 60(3), 364–378.Google Scholar
- Cook, P., & Graham, D. (1977). The demand for insurance and protection: The case of irreplaceable commodities. Quarterly Journal of Economics, 99(1), 143–156.Google Scholar
- Cummins, J. D. (2006). Should the government provide insurance for catastrophes? Federal Reserve Bank of St. Louis Review, 88(4), 337–379.Google Scholar
- Federal Emergency Management Agency. (2002). National Flood Insurance Program. Program description. http://www.fema.gov/media-library/assets/documents/1150.
- Froot, K. (Ed.). (1999). The financing of catastrophe risk. Chicago: University of Chicago Press.Google Scholar
- Kunreuther, H., Ginsburg, R., Miller, L., Sagi, P., Slovic, P., Borkin, B., & Katz, N. (1978). Disaster insurance protection. New York: Wiley.Google Scholar
- Moss, D. A. (1999). Courting disaster? The transformation of federal disaster policy since 1803. In K. Froot (Ed.), The financing of catastrophe risk (Chapter 8). Chicago: University of Chicago Press.Google Scholar