Lecture # 03

Social and Economic Impacts of

Hazards
 Basic Economics
• The price and quantity of goods available
in a market are determined by the demand
for the good and the supply of a good
available at any given time.
• To illustrate let’s consider a simple graph.
 Basic Economics
Price Determination
• Demand has a
downward slope to
show that consumers
will purchase more as
price decreases.
• Supply has an
upward slope to show
that firms will sell
more as price
increases.
 Basic Economics
Market Intervention
• This graph shows
what happens when
an artificial price
below the market
price is imposed on
the market. This
action results in a
shortage of the good.
 Basic Economics
Market Intervention
• This graph shows
what happens when
an artificial price
above the market
price is imposed on
the market. This
action results in a
surplus of the good.
 Basic Economics
Market Intervention
• This graph shows
what happens when
an artificial quantity is
imposed on the
market. This action
results in a shortage
of the good.
 Basic Economics
Macro Issues
• Macroeconomics considers issues that extend
beyond the market for a particular good. We are
still concerned about price and quantity but now
price is the price level of all goods and quantity is
the quantity of all goods commonly referred to as
Gross Domestic Product.
• Long Run Aggregate Supply (LRAS) is shown as
a vertical line because it represents a sustainable
level of potential output.
• Aggregate demand is an economic measurement
of the total amount of demand for all finished goods
and services produced in an economy
 Basic Economics
Macro Issues
• Short Run Aggregate
Supply (SRAS) has
an upward slope to
show how producers
respond to higher
prices.
• Aggregate Demand
has a downward
slope to show how
consumers respond
to higher prices.
 Basic Economics
Demand Pull Inflation
• If Aggregate Demand
increases beyond the
economy’s ability to
provide the goods on
a sustainable basis,
(LRAS) inflation
occurs. Note the
difference in the price
level.
 Basic Economics
Cost Push Inflation
• If SRAS decreases to
a point below the
LRAS, inflation can
also occur. Note the
difference in the price
level.
 Basic Economics
Recession
• If Aggregate Demand
decreases to a point
below the LRAS,
recession can occur.
• The official definition
of a recession is two
consecutive quarters
of a decline in Real
GDP.
 Basic Economics
Employment
• One crucial question for macroeconomists
is employment.
• To illustrate the issues, consider a graph
intended to represent the market for labor.
• Firms Demand labor so the demand curve
comes from their need for workers.
• Workers Supply labor so the supply curve
comes from their desire to work.
 Basic Economics
Decrease in Employment
• If Demand for labor
decreases, some
workers will lose their
jobs. Usually this
decrease in labor
demand is associated
with a recession since
firms are unable to
hire workers when
demand for their
products declines.
 Basic Economics
Increase in Employment
• If Demand for labor
increases, firms will
need to hire more
workers, pushing
wages up. Usually
this is associated with
an expansion in
economic activity.
 Natural Hazard Issues
Risk/Uncertainty
• Risk – weighs the chance of a good
outcome against the chance of a bad
outcome
• Example: Should I buy stock in a
particular company?
– Good outcome: Price of stock increases
– Bad outcome: Price of stock decreases
• How do you decide?
 Natural Hazard Issues
Risk/Uncertainty
• While risk weighs the chances of a good
outcome versus bad, those chances
(Probabilities) can be quantified.
• Uncertainty is the inability to quantify those
probabilities or more broadly, the degree
to which those probabilities are known.
 Natural Hazard Issues
Risk/Uncertainty
• Which is riskier?
– Purchase 100 shares of Oil Company?
– Purchase 100 shares of a new startup
company?
• Since the startup has no history, the
chance of an increase in price is unknown.
 Natural Hazard Issues
Risk/Uncertainty
• Natural Hazards are a special case since
they occur so infrequently that most
people do not understand the risk.
• Howard Kunreuther suggested that these
hazards are “Low Probability, High
Consequence” events.
• Question: How do people, who live in
threatened areas, treat this risk?
 Natural Hazard Issues
Mitigation
• Simply put, mitigation is actions taken
before a disaster or catastrophe, that will
minimize the negative consequences of
the event.
• These actions can be by individuals or by
the community.
 Natural Hazard Issues
Mitigation
• Will individuals take actions, before an
event occurs, to protect themselves?
• One way to examine this question is to
see if individuals place any “value” on
homes that contain mitigations.
• Answer appears to be yes, at least in
areas where a known hazard is obvious to
residents.
 Natural Hazard Issues
Mitigation
• Can government stimulate voluntary
mitigation?
• Tax Incentives
– SB 696 State of Oklahoma passed a measure
in 2002 to grant a property tax exemption of
up to 10% for homes having a tornado safe-
room.
 Natural Hazard Issues
Mitigation
• Can government stimulate voluntary
mitigation?
• Direct Subsidy
– After the May 3, 1999 tornado in central
Oklahoma, FEMA and the state of Oklahoma
provided grants to homeowners who installed
tornado safe-rooms.
 Natural Hazard Issues
Public Mitigation
• What options are available to communities
to lessen the impact of predictable
disasters or catastrophes?
• Are there competing pressures placed on
officials regarding these actions?
 Natural Hazard Issues
Public Mitigation
• Land Use Restrictions (Government)
– Communities prone to floods may decide to
restrict development in high risk areas
• Competing Pressures?
– Developers
– Residents
 Natural Hazard Issues
Public Mitigation
• Building Codes (Local Government)
– Communities prone to predictable hazards
can adopt requirements for builders to
construct buildings/homes to withstand the
hazard.
• Hurricanes
• Tornadoes
• Earthquakes
• Competing Pressures?
 Natural Hazard Issues
Public Mitigation
• Warning Systems (Federal Government)
• Tornadoes
– National Weather Service (NWS) Doppler
Radar
• Hurricanes
– NWS Flights
• Geo-Hazards
– USGS Monitoring
 Natural Hazard Issues
Public Mitigation
• Evacuation (Government)
– Difficult due to the uncertainty regarding storm
strength, direction, etc.
• Challenges
– False Alarms
– Voluntary vs. Mandatory
– Economic Effect
– Health risks during evacuation
 Macro Issues
Gross Domestic Product
• This graph shows
how a catastrophe
can affect economic
activity. If people are
forced to move, the
Aggregate Demand
will decrease causing
a recession, at least
locally or regionally.
 Macro Issues
Gross Domestic Product
• If the affected region produces a strategic
product for the rest of the country, larger
problems can migrate to other parts of the
country.
– Example: Disruption of oil refining capacity.

Disruption of transportation
network.
 Macro Issues
Inflation
• Inflation
– If a catastrophe causes
the supply of goods to
decrease in the affected
region, prices will
increase.
– On a larger scale, if
goods from the affected
region are unavailable
for distribution
elsewhere, then the
larger economy will
experience inflation as
well.
 Macro Issues
Inflation
• Inflation
– Inflation can also be
caused by a sharp increase
in the demand for goods
that is not met by a similar
increase in supply.
Disasters and catastrophes
can increase the demand
for some goods,
particularly essential items,
like food and fuel. If supply
of these goods cannot
meet demand, prices may
increase.
 Macro Issues
Employment
• The question of how a catastrophe will
affect employment can give ambiguous
answers.
– Increase in regional employment
• Rebuilding efforts may actually increase aggregate
employment in the region
– Decrease in employment
• A catastrophe may cause large migration. This will
have the effect of decreasing the supply of labor
thus causing an overall decrease in employment.
 Macro Issues
Employment
• This graph shows
how a loss of labor
supply can affect the
labor market in the
region. Remaining
employers and firms
trying to help rebuild
the community have
to pay higher wages
due to the loss of
workers.
 Macro Issues
Migration
• Voluntary Migration
– A catastrophe can change the opportunities
available to residents. If they perceive that
they would be better off in a new location, this
can prompt some migration
• Involuntary Migration
– When catastrophes make living or working in
a region impossible for many, mass migration
can occur
 Macro Issues
Migration
• Mass Migration Examples
– Western Oklahoma (1930’s)
• Drought conditions caused many families who
depended on farming to move. Other businesses
that depended on the farmers were also affected.
– Southern Louisiana/Mississippi (2005)
• Hurricane Katrina caused the largest migration in
recent history.
 Financial Markets
Insurance
• Insurance companies are financial
intermediaries which help spread the risk
of various hazards.
• Insurers collect premiums from a large
pool of customers and provide payments
to those who experience some type of
loss.
 Financial Markets
Insurance
• If an area is struck by a catastrophe,
premiums will increase.
• The recent hurricanes in Florida caused
several insurance companies to stop
issuing insurance in that state. If this trend
continues, the cost to live in that state will
rise dramatically, making further growth
difficult.
 Financial Markets
Insurance
• Flood Insurance
– Flooding is one hazard that is not covered on
a standard homeowners policy as many
residents of Louisiana and Mississippi
discovered after Hurricane Katrina
– It is available through a federal government
program at subsidized rates.
 Financial Markets
Insurance
• To keep the cost of insurance affordable,
insurance companies are strong
advocates of measures that will limit
property damage.
– Strict Building Codes
– Restricted development in vulnerable areas
 Financial Markets
Banking
• Catastrophes may negatively affect local
or regional banks more than large national
banks
– Loans are based on the value of pledged
collateral
– Any uninsured damage to that collateral
makes default more likely
– If the event causes businesses to cease
operating, the regional banks will suffer due to
the loss of loan and deposit activity
 Financial Markets
Banking
• A solid banking system is essential for any
economy to survive
• The depression of the 1930’s led to the
creation of the Federal Deposit Insurance
Corporation (FDIC) which has made a
very stable banking system.
• Recent research suggests that banks are
resilient even after a catastrophe.
 Financial Markets
Real Estate
• Real estate markets are local. As a result, they
rise or fall as local economies rise or fall. A
catastrophe that diminishes economic activity
will be felt in the value of regional real estate.
• Catastrophes also reveal regional vulnerabilities
that may not have been known. As a result,
some jurisdictions may cease to exist following a
catastrophe.
 Financial Markets
Real Estate

• Generally speaking, real estate markets

recover as the local economy recovers.
 Event Analysis

• Creeping Catastrophe
– Dust Bowl
• Western Oklahoma (1930’s)
– Florida (Speculative)
• Rising Insurance Costs
• Potential Out Migration
 Event Analysis
Speculative Effects of a Catastrophe
Macro Effects
• Inflation
– Nationally
– Regionally
• Employment
– Nationally
– Regionally
 Event Analysis
Speculative Effects of a Catastrophe
Macro Effects
• Migration
– Loss of an economic livelihood will drive
residents to leave the area
– Effects on destination cities
• Destination cities after Katrina have reported
significant problems as they try to absorb the new
residents
 Event Analysis
Speculative Effects of a Catastrophe
Macro Effects
• Monetary Systems
– Loss of local and regional banks would make
credit difficult to obtain
– A short term loss in the availability of cash
may cause residents to resort to a primitive
system of exchange (Barter)
– Barter is inefficient in that it requires what
economists call a “double coincidence of
wants”
 Event Analysis
Speculative Effects of a Catastrophe
Macro Effects
• Strategic Infrastructure
– If the catastrophe occurs in a region that
supplies a commodity necessary for the
economic health of the nation, the pain of the
event will be felt nationally
• Examples: Oil Refineries
Transportation Arteries
 Event Analysis
Speculative Effects of a Catastrophe
Micro Effects
• Regional Businesses
– would have to relocate or may simply cease
to operate
• Employment
– Residents lose jobs that may be hard to
replace
 Event Analysis
Speculative Effects of a Catastrophe
Micro Effects
• Social Services
– Major population displacement makes it
difficult to:
• Man agencies designed to assist those in need
• Locate families that would need assistance
• Social Issues
– Communities/families are dispersed
– For some, these communities are a life line
 Social Implications
• Vulnerable Populations
– Children
– Elderly
– Low Income
 Social Implications
• Barriers to Planning
– Children
– Elderly
– Low Income
 Socio-economic
Health
Education
Human
Governance & Institutions
Infrastructure
Economy
Politics
Environment
Health
Staff, Hospitals, Medicines, Access,
Epidemics, Psychology
Socioeconomic Aspects
 Humans
Deaths, Injuries Structure, Special needs,
Psychology, Immigration
 Governance & Institutions
Law, Rights and voice, Violence and
terrorism, Effectiveness, Corruption
 Environment
Basic geography, Land use/ land cover,
Pollution
 Education
Staff, Facilities, Resources, Access,
Outcome
 Economy
Losses, Income distribution, Poverty, Labour
market, Resources, Activity
 Infrastructure
Transport & com., Energy, Water and
sanitation, buildings, Equipment and non-
structural components
 Politics

Conflict, Confidence, Stability, Governance

 Pakistan 2005 Earthquake
On October 8, 2005, at 8:50 a.m. local time,
a magnitude Mw = 7.6 earthquake struck the
Himalayan region of northern Pakistan and
Kashmir. The earthquake epicenter was
located approximately 19 km north northeast
of the city of Muzaffarabad, the capital of the
Pakistani-administered part of Kashmir,
known as Azad Jammu Kashmir (AJK).
 Pakistani government’s official
• The death toll as of November 2005 stood at
87,350.
• Approximately 138,000 were injured and Over 3.5
million rendered homeless.
• 19,000 children died in the earthquake, most of
them in widespread collapses of school buildings.
• The earthquake affected more than 500,000
families.
• Approximately 250,000 farm animals died due to
collapse of stone barns, and more than 500,000
large animals required immediate shelter from the
harsh winter.
• More than 780,000 buildings were either destroyed or damaged
beyond repair, and many more were rendered unusable for
extended periods of time.
• Out of these, approximately 17,000 school buildings and most
major hospitals close to the epicenter were destroyed or
severely damaged.
• Lifelines were adversely affected, especially the numerous vital
roads and highways that were closed by landslides and bridge
failures.
• Several areas remained cut off via land routes even three
months after the main event.
• Power, water supply, and telecommunication services were
down for varying lengths of time, although in most areas
services were restored within a few weeks.
• Massive land sliding
• A very dense, high-frequency band of
landslides was triggered along the fault
rupture trace in the midslope areas;
• Almost all landslides were shallow,
disaggregated slides, with two of them
larger than 0.1 km2 .
• Due to the generally arid landscape,
liquefaction was not observed or at
minimum rate.