# _<u>Box 5: Does lack of information drive lack of response?</u>_

<mark>In the US, information campaigns regarding disaster risk have apparently had little impact on behavior (Praeter and Lindell, 2000). In California, a 1971 law mandating that prospective buyers be informed of a property’s location in a surface fault rupture zone had no impact on property prices in those zones (Palm, 1981). In Japan, Shaw et. al. (2004) find that formal education plays a limited role in promoting actions towards earthquake preparedness. A similar conclusion applies to the value of risk-reduction regarding environmental health risk in the US. A study comparing housing prices in areas that qualified for Superfund cleanups compared to areas that narrowly missed qualification found that being put on a list that suggests the need for a significant environmental cleanup effort because of health risks does not reduce rental prices and that cleanups themselves are associated with statistically insignificant changes in property values, rental rates and population (Greenstone and Gallagher, 2008).</mark>

# **The Benefit-Cost of Disaster Mitigation**

If neither moral hazard, a lack of recognition of risks or a simplistic valuation of prevention measures as a ‘luxury good’ appears to fully account for limited mitigation effort on the side of individuals and frequently limited demand for public mitigation measures, might there be a role for the rational calculation of costs and benefits in explaining inaction?

Calculation of the benefits and costs of disaster risk reduction measures such as building strengthening/retrofit involves estimates and assumptions covering a range of factors – strengthening/retrofit costs, building replacement costs, the risk of a natural disaster (and of the scale of that disaster), the risk of damage if a natural disaster does occur, the cost of that damage in both financial and human terms and the discount rate. These last estimates, in particular, involve a difficult calculus regarding the economic value of a human life as well as how differently we value that life today over a life 30 years hence.

Take a base case scenario using estimates many of which are drawn from an exercise comparing costs and benefits of retrofitting apartment buildings in Istanbul to make them earthquake-resistant. This involves an apartment building with a $250,000 reconstruction cost and $80,000 retrofit/strengthened construction cost (that will prevent any damage in an earthquake). The probability of an earthquake in any year is set at 2%, and the chance that the building will collapse in an earthquake is 10%. If it does collapse, ten people are assumed to die, with a statistical value of life set at $250,000. The discount rate is set at 5 percent and the span of years over which we account for costs and benefits is 30.<sup>10</sup> Under this scenario, the benefits of retrofitting about equal costs – the benefit-cost ratio is 1.0.

> 10 The construction, retrofitting, deaths are taken from Smyth et. al. based on Istanbul data.  Ther value of a statistical life is set at $250,000 for reasons that will be clear in the text –as opposed to the Smyth et. al. figure of $1,000,000.

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