The Economic Effects of Natural Disasters Tripti Misir ECON 115- Money and Markets Professor Corrin New Jersey City University Abstract This paper will explore the economic effects of natural disasters in our world. It will discuss and answer a various amount of questions regarding these disasters. What different types of natural disasters are there? How do they occur? Where do they specifically occur? How can they be prevented? Is it even possible to prevent these disasters? These questions will be answered solely for the purpose of holding a better understanding about the topic at hand. The majority of this paper, however, will be focused on the economic effects of these disasters. Typically, when one thinks of the economic effects of such disastrous tragedies, the only thing that comes to mind is the cost of rebuilding and funding needed to restore a specific community. However, there are many other effects on the economy that arise when such a horrible event occurs. For example, the paper will discuss how these disasters make a difference in the supply and demand of certain products. It will display the economic issue of limited resources and unlimited wants. The topic of scarce resources and rationing techniques will be spoken about in relevance to this specific topic. Also, price elasticity can be seen as an economic issue when dealing with a period after a natural disaster. The budget process related to any natural disaster occurrence and the political ramifications that follow will also be talked about through this paper. Finally, the relationship between marginal revenue and marginal cost will be included in relevance to the aftermath of a disaster. The economic effects of natural disasters are sometimes extremely long-lasting, and it is important for people to not only be aware of the short term effects but also of the long. Keywords: natural disaster, economic effects, supply, demand, resources, unlimited wants, rationing, price elasticity, budget, political ramifications, marginal revenue, marginal costWhen one thinks of the economic impacts of a natural disaster, the most popular is the cost of rebuilding. Although most see that as one of the few outcomes regarding economics, there are many more things that are affected. The issue is that many people are only able to see the short-term effects of these events. The short-term outcomes would consist of rebuilding major buildings, rebuilding homes, and rebuilding infrastructure. Another short-term outcome may consist of providing financial aid for those in need. However, there are many long-term economic effects that may not be as easy for people to notice. These outside effects include supply and demand, the issue of limited resources and unlimited wants of people, scarce resources and rationing techniques needed for survival, price elasticity in the period following a natural disaster, the budget process of a disaster, the negative political ramifications that follow and the effects of marginal revenue and marginal cost on one another. It is important to have an understanding of what each of these categories in the economic system mean. By knowing what they each are, the society affected can be more aware of what must be done in order to have a faster and more successful recovery process. Each of these economic categories are effects of natural disasters that can be long-lasting issues. They may seem to fade away over time, yet it may be a very long time before they fully are extinguished and overcome by a community and its government. The economic effects of natural disasters are what takes one of the largest tolls on a community and is not only short-term, but has lasting long-term effects on people, industry, families and others. Before analyzing the effects of these kinds of occurrences, it is important to fully understand what they are and what they can do. A natural disaster is an event that occurs through the power of nature. These events can be extremely destructive and they can take away the lives of many individuals. These events come in a very wide range. Examples of natural disasters are “tsunamis, earthquakes, thunderstorms, volcanoes, tornadoes, hurricanes, heat and drought, wild fire, cold and ice storms, avalanches, snow and hail storms, flooding, pestilence and disease, and global warming” (Natural Disasters Association). They all happen in very different ways. For example, a tsunami occurs because of earthquakes. The water becomes extremely rough and rushes outward to cause mass destruction. An earthquake occurs when the rock plates underground break. When they are broken they will rub against each other. The rubbing against causes tension, and therefore, the earthquake occurs and harsh shaking can be felt. Tornadoes occur when cold air meets warm air or when wet air meets dry air. These events all occur differently, yet they all cause a large amount of destruction and damage to a given area. These natural disasters cannot be prevented due to the fact that every single one of them are in the hands of Mother Nature. Every single one of them are caused by something that happens in the atmosphere or in the Earth itself and therefore, man has absolutely no control over how it occurs and when it occurs and even over how bad it occurs at the time. All man can do about these destructive disasters is prepare beforehand, try to stay somewhere trustworthy and safe during the horrific event, and be ready to take on the aftermath. This is the very basic and simply descriptive information about natural disasters and how some of them occur. However, the important and crucial part to our knowledge involves the effects and specifically to this paper, the economic effects. The supply and demand process, in economics, according to the Economic Library, is defined as “supply, which is how much of something you have, and demand, which is how much of something people want” (Supply and Demand, Markets and Prices). In relevance to this specific topic, natural disasters’ aftermath calls for and may require the need of specific commodities. However, the issue is that a large mass of people may need that one item, resulting in the outcome that there may be a lack of resources. For example, according to news reports, Hurricane Sandy was the cause of over 250,000 power outages. Because of this, many individuals and families are left with absolutely no power and electricity in their homes and most likely no heat in their homes either. Therefore, many individuals have generators and items of that sort for instances such as this. For the generator, in order to provide some heat, gasoline is required. Gasoline is one of those demands of the people during and after a natural disaster, such as Sandy. However, the supply of that gasoline quickly diminishes in no time and many families are left with no supply of their demand. Besides the major product of gasoline, also, the generators are a smaller scale item that quickly is out of stock therefore, out of supply in the majority of stores. Everyone knows that they will be in need of heat and some electricity and because of this, a larger population of people are demanding the product of the generator. This is one of the economic effects of natural disasters that people look over. Yes, the issue is noted, however, the true effects are not realized. Because there is not enough of what the people are demanding, companies may lose some possible profit. If there had been enough of that demand, the people would be more covered during this disaster, and the company itself would have made a higher profit. However, companies can make use of methods to resolve such high demand. That is to raise prices. According to the Foundation For Teaching Economics, “Like a supply shock, a demand shock is addressed by price signals that not only communicate information but also provide incentives that change people’s behavior in markets. The higher prices that accompany consumption shock encourage consumers to purchase less – which is a good thing given the suddenly greater relative scarcity.” (FTE, 2017). This method may seem unfair at first since it seems to be only pushing away customers who may not be able to afford. However, this method only helps the consumer. It guides them into truly thinking about what they really need in comparison to just another one of their unlimited wants. High demand and less supply is highly relevant to the issue of natural disasters. Specifically, the lack of supply from a company is an economic impact of natural disasters. Therefore, it is crucial to find solutions to such issue. The issue of supply and demand is directly related to the issue of the lack of resources yet the unlimited wants. The example given above is proof of this claim. In times of natural disasters, such as Hurricane Sandy, people are expecting destruction and therefore have the urge and want every product and item that will aid in keeping them and their families in safe condition. This is an extremely valid behavior since that is the goal during a disaster is to stay safe. However, the problem is the limited resource aspect of it. People in a community desire commodities that may be scarce in such times. The gasoline product falls into the category of the unlimited wants of the community. The lack of a large amount of gasoline during a hurricane falls into the category of the lack of resources. This issue of unlimited wants versus the lack of resource, which is very similar to the issue of supply and demand during a disaster, is another economic impact of natural disasters. Another term for these lack of resources is scarce resources. Because of scarce resources, people have to learn the technique of rationing. According to the Cambridge Dictionary, the term “rationing” is defined as a system of limiting the amount of something that each person is allowed to have.” In continuation of the example of gasoline availability during a hurricane, gas stations tend to ration during the period following a disaster. Basically, the company limits each customer on the amount of gallons of gasoline they can purchase on that day. According to the Foundation For Teaching Economics, “Scarcity requires rationing. The basic question an economy must answer is not whether to ration but which method of rationing uses resources in such a way as to satisfy the most wants and needs.” (FTE, 2017). Rationing, as stated here, is a necessary technique in times of disaster. One method of rationing is pricing. This method is an impactful one on companies and buyers. As briefly stated earlier on, pricing helps consumers to distinguish between what their needs are and what their wants are. This is a rationing method because certain consumers, who were only buying for their personal wants, are cut out from the purchasing population. Because of this, there is more supply left for those who truly need the product. Less of that product goes to waste and instead more product is used amongst many people. A product that is manipulated in price because of a big change in demand is an elastic product. This is relevant to the economic process of price elasticity. This is an economic effect of natural disasters also. During a disastrous time, supply of products that call for a high demand go up in price. For example, during Hurricane Sandy, gasoline prices were up in the sky in comparison to the regular price on a normal day. This is because the government was making use of the pricing method in order to ration the supply of gasoline. This meant that, because it was so expensive, consumers would only buy the amount of gallons they specifically needed and maybe a little more. People were not simply buying gasoline to have a large amount of excess just in case they needed it. This method caused for more gasoline to actually be used and not to just be sitting in storage, waiting to be used. The pricing method is an important method to make use of in order to ration appropriately.”First, the higher price acts as an incentive for consumers to conserve. For example, an extended family with two or three damaged houses may decide to crowd together in one rental house or apartment after the storm to keep expenses down.Second, higher prices call into the market housing that was not available at lower prices. People may decide to rent spare rooms, empty apartments above garages, or travel trailers normally parked in storage, for example.” (Foundation For Teaching Economics, 2017). The FTE gives this example, which clearly shows how this works as a true method/technique of rationing. People are forced to see what needs to be done. High prices push them into being able to distinguish between what a need is at the time and what a want is at the time. It may be a want to have their own, private place to stay, but it is realistic to conserve money by simply staying with other family members in one house. That way, money can be saved in order to get the needs at the time such as food and gas, for example. These thoughts and realizations are because of the smart method of rationing in times such as a natural disaster. Another method is limitations, which was also used during this very hurricane in New Jersey and in New York. This method was simply restricting each customer to a certain amount of gasoline. Only a certain amount of gallons were allowed to be purchased in a specific time period. Even license plate numbers would go on one day and odds on the next day. This was a method of organization. Pricing and limitations were methods of rationing used during Hurricane Sandy that allowed for less waste and more full usage of resources. Prices were being raised by units, making revenue. The marginal cost and marginal revenue were providing for full income for companies. When resources are scarce, rationing methods must be implied in order for the best possible outcomes for both consumers and companies. Another economic effect of natural disasters is the overall budget spending on disasters. This is the typical effect that most people automatically think of. This involves the cost of rebuilding buildings, homes, damaged infrastructure such as bridges, etc. Natural disasters, depending on the intensity, can cause a few structural damages, or they can wipe out an entire area completely. Destructive events such as these are funded through disaster relief funds. Agencies in the United States, such as the Federal Emergency Management Agency (FEMA), cover major instances such as these natural destruction costs. These costs of damage are not low numbers either. These disastrous events take a toll on our economy by using so much money on rebuilding. “Superstorm Sandy caused $65 billion in damage in the U.S., making it the second-costliest weather disaster in American history behind only Hurricane Katrina, according to the National Oceanic and Atmospheric Administration (NOAA)” (Rice & Dastagir, 2013). The budget that is kept by the nation is very important for when events like this occur. If no fund was available and saved, then this factor would take an even larger toll on the economy. Stemming from cost of rebuilding is another extremely impacting economic effect of natural disasters. When destruction occurs, many buildings are completely destroyed. The cost to rebuild that building is impactful, but what is more impactful is the fact that business cannot be ran. Without a location and a home for business to occur, it can’t. This stalls profit for that specific company/business. Because there is no flow of money coming in, there is no money to pay employees. Therefore, mass unemployment can occur for a specific amount of time. Based on the size of the company, the amount of unemployment can be determined. Because there is no action happening and no money flowing in, certain bills the company has may not be paid, simply because there is no money to pay them. This analysis is to a far extent, yet it is a very realistic scenario. Much unemployment can occur and many businesses can go out of business. This is the case because the rebuilding of the company/business up again may be a very long-term process. If enough money can be provided or if the money has been saved, then it is possible for the company to be rebuilt up again in a much faster fashion. Besides the extreme, stores and businesses in an affected area may experience temporary damages to their stores, for example flooding. Even these smaller scale occurrences take time away from running sales and business. Overall, the main essence is that natural disasters have an impactful economic effect on businesses by slowing sales and profit. The slowing of income for businesses/stores classifies as a negative political ramification in relation to economics. Ramifications are simply effects that occur on a larger scale because of one event. When a business is not in action and it is removed/goes out of business, that is a loss for the government. Businesses pay taxes and pay money in order to have that business, especially where they specifically chose to have it. When many companies go out of business, it is not good for the government. This loss of money, a political ramification, is a negative economic effect that natural disasters can cause. Although the focus is the economic effects of natural disasters, there are many other effects that are worthy of being identified. These horrific events wipe out businesses, stores, and government buildings. However, these storms also wipe out millions of homes and millions of people. The economic effects take on a great toll on a community, on businesses and on the political world, but sometimes it is important to step out of the political picture for a minute and realize what is happening to the people. There is such a huge emotional rollercoaster that many people go through. Many family members are lost and many friends are lost in such events. “The number of deaths caused by natural disasters (22,452) is almost 80 percent below the average for the decade (97,954), much lower than the peak years of 2004 (242,829 deaths), 2008 (235,272 deaths) and 2010 (297,728 deaths).” (IFRC, 2014). It is unimaginable to read numbers such as “297,728 deaths” in one year due to disaster strikes. It is important to acknowledge this specific effect of natural disasters. Lives are taken away and many people are left to suffer grievances of their loved ones. Also, many people are left in pain due to other reasons. Many people completely lose their homes. They lose everything they had owned and lose everything their finances had gone into. Many people lose things of value to them. Because of this, they are left in pain and sorrow. This is a pain that no one can understand unless they have experienced such loss. Losing personal investments take a toll on an individual. However, losing a loved one can take an even larger toll on an individual. Natural disasters are dangerous events that affect our economy and can greatly affect the emotions of a large population of people by taking their loved ones or by taking their long-term investments such as homes and belongings. It is important to realize that economic effects are very long lasting. Other effects of such a disaster, for example, flood, will eventually go away. However, the roaring effect on the region’s economy takes much longer to fade away. “We show that Kauai’s economy has yet to recover, 18 years after this event. We estimate the island’s current population to be 12 percent smaller than it would have been had the hurricane not occurred.” (Coffman & Noy, 2012). Natural disasters are extremely horrifying, disastrous and destructive events. Man has no control over these disaster, due to the fact that it is all in the hands of Mother Nature. However, man can prepare for such events. It is important to prepare because much damage occurs to an economy following a disaster. There becomes and issue between supply and demand and limited resources of companies and the unlimited wants of the people. Therefore, it is important to know rationing techniques and to understand the ramifications that come out of such events. There is a budget that is put aside for these disasters, however being personally prepared is helpful. Natural disasters take a toll on an economy system and have very tough long-lasting impacts.