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Optimal disaster-preventive expenditure in a dynamic and stochastic model

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  • Takumi Motoyama

    (Graduate School of Economics, Osaka University)

Abstract

The purpose of this study is to present an analytical framework for publicly optimal disasterpreventive expenditure. We examine the optimal policy combination of tax rate, disaster-preventive expenditure, and productive government expenditure in a neoclassical growth model, in which natural disasters occur stochastically and partially destroy existing capital. Based on this model, we can decompose the welfare effect of raising preventive expenditure into three effects: the damage reduction, crowding out, and precautionary effects. By identifying these marginal benefits and costs, we obtain the policy conditions that maximize household welfare. Furthermore, we show that optimal prevention is increasing in disaster probability, and by using a numerical example, we show that there is an inverse U-shaped relationship between the expected growth rate and disaster probability.

Suggested Citation

  • Takumi Motoyama, 2015. "Optimal disaster-preventive expenditure in a dynamic and stochastic model," Discussion Papers in Economics and Business 15-03-Rev., Osaka University, Graduate School of Economics, revised Oct 2016.
    • Handle: RePEc:osk:wpaper:1503r
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    References listed on IDEAS

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    More about this item

    Keywords

    Natural disasters; Disaster-preventive expenditure; Optimal policy;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • H4 - Public Economics - - Publicly Provided Goods
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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