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Chapter 3: Prevention by Individuals

of a public good that a government should supply is lighthouses. However, Ronald Coase (1974), in a seminal article, notes that although economists often use lighthouses as examples of public goods, governments did not build lighthouses until very recently. Instead, lighthouses were built at considerable expense in remote and difficult locations to help ships ply dangerous waters and were financed by various associations of shipping companies (whose competitors would also benefit) and associations of seamen’s widows and orphans (who would not get their loved ones back). Cohen and Noll (1981) construct an elaborate model to determine the optimal building code in seismic areas, motivating the discussion by correctly stating that fires caused 90 percent of the damage following the 1906 San Francisco earthquake, leaving the reader with the impression that fire spread (the externality). A careful history of the San Francisco earthquake shows that numerous fires started simultaneously: 95 percent of residential chimneys were damaged, gas mains burst in numerous locations, street lanterns fell, and boilers exploded starting fires in multiple locations. People were overwhelmed, and there was not enough water to put out the fires. Economists also invoke asymmetric information—that one party to a contract (such as renter or home buyer) knows less than the other (the landlord or developer)—to explain “market failures” that government interventions could correct. Despite Akerlof’s (1970) elegant analysis of a market for lemons, used car markets thrive with dealers offering warranties, and workplaces have bulletin boards that allow employees to rely implicitly on their colleagues’ honesty. Similarly, every society deals differently with the enormous informational asymmetry in choosing a spouse: dating or living together first is accepted in some settings while extended family networks gather information and arrange a match in others. It is important to recognize the diverse arrangements that people devise without fixating on one that a few countries have found useful. Elinor Ostrom, whose work is better known after her 2009 Nobel Prize in economics, has long studied such mechanisms that have the advantage of selfenforcement. In some countries, builders establish a reputation for quality. In others, banks or insurers set standards for buildings they finance or insure. And in some, people rely on government, either through state ownership or regulations. History matters and arrangements are path-dependent, but important underlying differences influence what is effective and appropriate. Germany industrialized earlier and became more urban than France or Italy. This both influenced and reflected the mobility of labor and the type of dwellings (single family homes, abutting townhouses, and building with multiple units) and their ownership. Only 40 percent of German homes are owner-occupied, while the proportion is 68 percent in the United States, 80 percent in Spain, and 78 percent in Mexico.10 Rentals both require and reflect the ability to enforce contracts (such as evicting defaulting tenants without undue delay or expense).

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Profile for World Bank Group Publications

Natural Hazards, UnNatural Disasters: The Economics of Effective Prevention  

Earthquakes, droughts, floods, and storms are natural hazards, but unnatural disasters are the deaths and damages that result from human act...

Natural Hazards, UnNatural Disasters: The Economics of Effective Prevention  

Earthquakes, droughts, floods, and storms are natural hazards, but unnatural disasters are the deaths and damages that result from human act...

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