Facing natural hazards: uncertain and intertemporal elements of choosing shore protection along the Great Lakes

Abstract

One tool of the economic planner is Benefit Cost Analysis (BCA). This model's accuracy in describing human behavior has been criticized, particularly for uncertain and intertemporal choices. To the extent this holds, the model will be inaccurate in assessing benefits of shoreline protection measures and will provide reduced insight into policy choices. From a review of economic, psychology and geography literature, three points of criticism are: - when faced with losses, individuals tend not to be averse to risk, - when faced with low probability hazards, individuals tend to ignore the hazard altogether (truncate low probability), - when faced with choices over time, individuals have different rates at which they trade off benefits now versus later. Typically, applications of BCA do not account for these observations. The main objective of the study was to determine whether these criticisms are supported, and to draw conclusions regarding government policy for the flooding and erosion hazards on the Lakes. A Benefit Cost model was formulated to describe the individual shoreline property owner's behavior with respect to undertaking structural measures to mitigate flooding and/or erosion. To test the model, property owners on Lakes Erie, Ontario and Michigan were surveyed by mail. Experimental questions, focussing on the intertemporal and uncertain nature of the hazard protection choice were developed. The econometric analysis suggested that: - individuals varied in their time preference rate, - the probability of low chance events was truncated by many respondents, - on average respondents were not risk averse, and - the above phenomena helped explain the choice to take protective action. Using a market rate for discounting in the BCA can provide inaccurate benefit estimates. Observed time preference rates may provide a better measure. Subsidized hazard insurance has been suggested to encourage self protection. Disregard for low probabilities, coupled with a lack of risk aversion, suggest such a program would not be successful. Subsidized loans for shore protection may be unsuccessful. Many people displayed a time preference rate above the market loan rate, yet they did not borrow. Information programs may be useful in promoting a better understanding of the hazards which may be faced by residents.

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