Tag Archives: Hurricane Sandy

01.03.2013 | Disaster Economics: Neighbors and Utility Companies

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 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.”

Posted by: adminEcon
Tags: Consolidated Edison, cost benefit analysis, Delta Plan, elevated substations, flooding, Hurricane Sandy, incentive, JCP&L, private cost, PSE&G, social cost, underground power lines
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11.06.2012 | Hurricane Sandy Stories

Just some notes today about close-to-home Hurricane Sandy economics.

Trees:

Walking down my NJ street, I stopped to talk with 2 gentleman in a truck from Gainesville, Florida. They said they did tree work and had driven the 1000 miles to look for business. And there was lots. Every neighbor has countless downed trees that need removal. That actually started me thinking how the euro-zone was created to facilitate the movement of labor and goods among many nations. And here, with labor from Florida in NJ, I saw the same idea firsthand.

Gasoline:

It is unbelievable that the governor of New York could have offered free gas to EVERYONE in NYC and Long Island. Worried about shortages, to millions of people, Governor Cuomo announced that 10 gallons of free gas would be available at emergency mobile gas stations. The idea did not quite work out. If you have a shortage of something and then offer it for free, what happens on the downward sloping demand curve? Much more quantity is demanded. Rather than create a public service, the Governor exacerbated the shortage and less was available for first responders to drive to storm emergencies.

Scrap:

A huge tree is still resting on my neighbor’s car roof in his driveway. The car might soon end up at the Claremont Terminal scrap yard. A destination for bags of soda cans, steel from the old Yankee Stadium and now debris from Hurricane Sandy, the scrap business sees a supply increase after storms like Sandy. Described by a scrap yard executive, “You’ll see a quiet period as material is aggregated and cleanup begins, but then a lot will start coming in.” As he also explained, cars arrive last because of insurance issues. (This econlife post has more about scrap yards.)

Sources and Resources: This NBC report has more about the Governor’s free gas plan and pictures of the response while this WSJ.com article made the scrap yard business interesting and was the source of my quote.

Posted by: adminEcon
Tags: Claremont Terminal Scrap Yard, demand, euro zone, free gas, gasoline shortages, Governor Christie, Governor Cuomo, Hurricane Sandy, labor, NJ, scrap business, supply chain, tree removal
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11.02.2012 | A New Name for Price Gouging

Yesterday, a friend of mine waited on a gas line for 3 hours to fill his tank. The price was close to normal but the line was not.

Hearing about gas lines, I remembered when Boston’s water supply was temporarily undrinkable several years ago and politicians warned vendors not to increase the price of bottled water. Calling it “price gouging,” they said that when an emergency strikes, the last thing people want is to pay more.

But, I wonder…

Imagine 2 bottled water sellers. Making a small profit per bottle, one seller maintains her normal price. At $1.00, sales soar, her shelves are soon empty and they remain empty. Meanwhile the second vendor doubles her price and her profits. With the incentive to discover new water suppliers, she restocks.

Low price or more water? Which do you prefer?

But there is more to the story. What if the second vendor had to pay a fine for an excessive price increase because Boston had a price gouging law? A 2006 FTC report cites examples of gas stations in states with price gouging laws that have closed rather than risk a lawsuit for price hikes during an emergency.

And that returns us to my friend in the gas line. In NJ, a gasoline station was fined $50,000 for price gouging after Hurricane Irene. I wonder whether New Jersey’s price gouging law is affecting the length of gas lines. Maybe instead, we should just let the incentives on the supply side do their job.

And the new name for price gouging should be “increasing supply.”

Sources and Resources: This ungated WSJ article provides an insightful discussion of price gouging and the 2006 FTC report.

Posted by: adminEcon
Tags: demand, excessive price increases, gas lines, gas prices, Hurricane Irene, Hurricane Katrina, Hurricane Sandy, New Jersey, price gouging, supply, the power of the market
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10.31.2012 | The Economics of Natural Disasters

With Hurricane Sandy having just blown through my NJ neighborhood, our streets are covered with wires, leaves, branches and several huge trees. During the storm, Consolidated Edison darkened large swaths of NYC and the New York Stock Exchange suspended trading for 2 days. With schools, offices, bridges, tunnels and malls closed, I’ve been reading about the economics of natural disasters.

Vulnerability.

After its 2010 earthquake, Haiti suffered more than 200,000 fatalities and economic devastation. Chile was hit by a more intense earthquake in a densely populated area but had many fewer deaths and much less of a GDP impact. Had the quake struck a deserted island, it would have been a non-event.

The difference from Haiti to Chile to that uninhibited island was vulnerability–a vulnerability that related directly to each country’s economy. Nobel laureate Amartya Sen expressed that economic vulnerability to natural disasters when he said,”Starvation is the characteristic of some people not having enough food to eat. It is not the characteristic of there being not enough food to eat.” (from Sen, 1981, in his economic history of famines)

The Inter-American Development Bank (IDB) 2010 paper that quoted Dr. Sen and started me thinking about disaster economics and vulnerability presented conclusions from other disaster studies that I wanted to share with you:

More unequal societies tend to have less allocated to disaster prevention.
In nations with stronger property rights, the impact of natural disasters tends to be weaker.
In India, more newspaper distribution meant less natural disaster impact. (Perhaps because the media exert political pressure.)
US politicians benefit more from disaster aid than prevention.
Autocratic regimes tend to have deadlier famines than democracies.

Where does this leave us? The economics of natural disasters are about more than prevention and response.

And finally…Thinking about a natural disaster, economics and vulnerability, I recommend seeing “Beasts of the Southern Wild.”

Sources and Resources: My facts and the graph below are primarily from an IDB Working Paper-124, “The Economics of Natural Disasters,” and a Nature article from 1/10/12.

From: Inter-American Development Bank, WP-124

Posted by: adminEcon
Tags: "Beasts of the Southern Wild", Amartya Sen, Chile, disaster economics, earthquake, famine, GDP, Haiti, Hurricane Sandy, New Jersey
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10.28.2012 | Storm Warnings

Some thoughts today about predicting natural disasters.

Weeks before 308 people perished in L’Aquila from an earthquake, a government commission proclaimed the chance was slim that a disaster would occur. It did happen and now, the 6 scientists and single government official who made the wrong prediction were sentenced by an Italian court to 6 years in jail for manslaughter.

Can you imagine the unintended costs of the court’s decision? Worrying more about jail than accuracy, scientists might predict many more natural disasters. Or, researchers might just refuse to serve on government commissions.

By contrast, here in New Jersey, we are being told to prepare for a hurricane that might be a record breaker. Responding, people near the shore are boarding windows and evacuating. Throughout the state, supermarket shelves are emptying and offices are closing.

An accurate prediction? If the storm does what the models predict, it will arrive within 24 hours but no one is positive.

As economists, where does this leave us? It takes me to Frederic Bastiat. Too often people seem to think that storms can boost GDP through the extra purchases they entail. Commenting, 19th century economist Frédéric Bastiat, in his “fallacy of the broken window,” tells us that disaster recovery only replaces what we already had. Using the land, labor and capital on new projects is far more beneficial. I wonder if his fallacy also applies to disaster preparation.

Whether looking at an Italian earthquake or a US hurricane prediction, does the spending they create wind up as misleading GDP additions?

Sources and resources: I used this Reuters article for facts about the Italian court decision while this NY Times Op-Ed conveys extra insight. To read more about broken windows, this econlife entry on the 2011 earthquake in Japan and this econlib excerpt from Frédéric Bastiat are possibilities.

Posted by: adminEcon
Tags: "fallacy of the broken window, cost, Frederic Bastiat, GDP, Hurricane Sandy, Italian earthquake, Natural Disasters, opportunity cost, unintended consequences
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