Saturday, 2 June 2012

VSL and earthquakes [updated]

Bill Kaye-Blake starts running the cold calculus on the weight we ought put on earthquake safety.
That is, given the known risks of earthquake, we should be willing over the next 50 years to invest over $5 billion $26om on earthquake safety in order to save the lives of people in Wellington. If we think that saving all those lives is impossible (which it likely is), then we can scale the total back. For 1,000 lives saved, the amount is $3.5 billion  $175m. This calculation doesn’t say anything about the 13,000 injured however. They need to be added in, too.
This is an example of an explicit cost-benefit analysis of the trade-offs we might be willing to make. We can spend some money to make buildings safer and save lives, or we can spend it on other things that also have value (health, education, and margaritas).
Dear reader, before you accuse me of being a heartless economist, let me point out that decision-makers are already making this trade-off.
The faster we move towards a liability regime, the better. Announce that, as of a five years from now, building owners will need to carry liability insurance for potential fatalities caused by their buildings. Insurers will set premiums to reflect building-specific risk. Owners then weigh the ongoing insurance cost against the cost of repairs and rebuilds. At the same time, switch from regulatory heritage preservation to local councils' paying annual subsidies for provision of heritage amenities.

Give it a few years so that we don't run into construction capacity constraints with the Christchurch rebuild, or import a pile of European and American unemployed builders on two-year work visas.

* Update: Bill corrected an error in his original figures - the relatively low risk of earthquakes makes the efficient level of expenditure lower. That also makes the actuarialy fair insurance levies lower.


  1. Eric. For this to work building owners, in particular owners of old building, would have to be allowed to do what they want with their building. What happens if an owners want to demolish his building but the council says he can't, Who is then liable?

    1. Need to move simultaneously to heritage preservation via subsidy rather than via diktat.

    2. I think you need more than that. You need to do something about outfits like the Historic Places Trust and other busybodies. If not then you get situation like the problems with the Cathedral.