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Disaster Economics: Neighbors and Utility Companies

by Elaine Schwartz    •    Jan 3, 2013    •    230 Views    •    TIME TO READ: 1 minute

Still dealing with the impact of Hurricane Sandy, I keep pondering the cost of preparing for the next storm. Personally, it has been worth purchasing a generator. But, what to do about my neighbor?

Located a half mile from my home, he has many beautiful old huge trees that were destabilized by the storm. Just a week ago, one tumbled down onto a power line during a rainstorm and eliminated our power for 6 hours until repair crews hauled the debris away. However, when asked to engage in further disaster prevention and cut down whatever remaining limbs threaten power lines, he refused.

Similarly, for my power company, it is much cheaper to clean up after a storm than to prepare for it. In NYC, Consolidated Edison (Con Ed) expects to spend $450 million cleaning up storm damage. And, when the Sandy relief bill passes Congress, I expect they will get some of the money. By contrast, storm prevention, including underground wires and elevated substations, would cost Con Ed 100 times as much.

So, if we focus on their private cost, it makes sense for my neighbor and Con Ed to do minimal disaster damage prevention. For them, prevention is much more expensive than clean-up.

But what if we move beyond and look at the “social” cost?

The entire cost benefit equation of disaster economics changes when we add the cost to society. Then, we include fatalities and storm related illness, lost work days, longer commuting times, school cancellations, lower retail sales, lower stock prices of retailers and even the diminished value of pension funds that hold those retail stocks. You see where I am going. The impact of Sandy has a far reaching ripple. Her cost has been huge.

The private cost of prevention is much greater than the private cost of clean up. However, the results might be reversed if we look at the private cost+social cost. Then, does prevention make sense? And if so, what should I do about my neighbor?

Sources and Resources: For more reading about the intricacies of disaster prevention, I suggest the NY Times article, “Hurricane Sandy Alters Utilities’ Calculus on Upgrades” and James Surowiecki’s New Yorker column, “Disaster Economics.”

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