How much more in taxes would you be willing to pay for the sake of reducing the risk of having to recover from the damage done by a natural disaster?
We're asking that question today as Hurricane Sandy has already done most of the damage it is going to do to the northeastern United States, but really, we're going to apply lessons learned back in 2005 from Hurricane Katrina. John Whitehead wrote in considering the cost of a flood-free New Orleans in the aftermath of that natural disaster:
From the NYTimes (New Orleans Floodplan Upgrade Urged):
Federal officials outlined plans yesterday for a significant improvement to the New Orleans flood-protection system by 2011, but said the total cost would be more than double the $7.1 billion that Congress has already appropriated for repairs and upgrades.
I'm wondering ... what is the breakeven willingness to pay that would justify this expense?
By spending an additional $7.6 billion, the Army Corps of Engineers could build higher, tougher floodwalls and gates to seal off waterways like the city’s enormous Inner Harbor Navigation Canal from storm surges, officials said. Permanent pumping stations at the mouths of the city’s drainage canals would block surging water from Lake Pontchartrain and effectively pump water out of the city during storms as well.
The officials said the upgraded system would result in a widespread reduction in water levels should the city be hit by the kind of flood that might have a 1 percent chance of occurring in any year. It would not eliminate flooding, however — rainwater could still accumulate to two or four feet in some sections of the city — and very intense storms could still do major damage.
Suppose the present value of costs (PVC) is $14.7 billion. The present value of benefits in perpetuity is:
- PVB = (P x B x N)/r
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