Location decisions would be optimal if those making these decisions had to bear the full social cost of any damages to their property and person from a disaster. Under these conditions, greater insurance premiums in areas that are prone to hurricanes, earthquakes, tsunamis, and other disasters would reflect the greater risk to life and property in these areas. The expected loss for those not insuring would rise in proportion to the greater risk. People, companies, and governments would then build homes, roads, businesses, and the like in disaster-prone regions only if the benefits exceeded the full risk of damages.
However, generous private and public help to victims of terrible disasters, while highly desirable, distort such rational calculations.
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This distortion goes under the name of the "Good Samaritan" paradox in philosophy and economics. To illustrate this problem, consider the behavior of loving parents toward their children. Such parents would come to the assistance of their children if they get into financial trouble, have serious medical problems, or experience other difficulties. At the same time, they want their children to use their money wisely, work and study hard, prepare for future contingencies, and lead healthy life, so that they can avoid personal disasters.
Unfortunately for the parents, children can distinguish reality from lectures, and threats that will not be backed up by parental behavior. If they anticipate that their parents will help them out if they get into trouble, and if they are not so altruist to their parents, they would consume and possibly gamble excessively, and they might quit good jobs to "find themselves". Parents might then be indirectly encouraging the very behavior by their children that they want them to avoid.
Thursday, September 08, 2005