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Introduction to The Economics of Disasters


download EOD Lesson Introduction Outline (including Appendix Catalog of Disasters)

The first unit of this curriculum guide aims to recognize and examine the economic impacts of natural disasters. Mandated content standards and testing have eliminated “current events” days from the social studies classroom calendar, transforming disasters from “teachable moments” to curricular inconvenience. While each disaster seems horrifyingly unique, using the economic way of thinking to sift through the chaos reveals threads of uniformity. Once identified, the common features of past disasters form a template for analyzing the current one, allowing teachers to quickly incorporate today’s unexpected news into instruction targeting existing curriculum objectives.

This set of lessons looks at a variety of natural disasters – from the Black Death of the Middle Ages to Hurricane Katrina in our too-recent memory, to fears of avian flu pandemics that haunt the future – through the lens of economic analysis. The contexts were chosen to facilitate the teaching of economic reasoning principles not only in economics courses but also in history and the other social studies disciplines. Each lesson addresses a question that reflects people’s compassionate reaction to news of disaster and develops one or two key tools of economic analysis in answering that question. Case studies of past disasters provide real-world illustrations of these principles. 

The chart below is a brief guide to the content and context of the lessons that make up The Economics of Disasters.

Lesson Title Economics Focus Context / Illustrations 
Lesson 1:  

Are Disasters Good for the Economy?

  •  scarcity & allocation
  • production possibility frontier
  • productivity
  • economic growth
  • technology
  •  Black Plague, 1347-50
  • Spanish Flu, 1918-19
  • Great Chicago Fire, 1871
Lesson 2:  

When Disaster Strikes, What Can Markets Do?

  •  price
  • supply shock
  • consumption shock
  • price controls
  • price gouging
  • incentives
  •  Great Chicago Fire, 1871
  • San Francisco Earthquake  & Fire, 1906
  • Asian Tsunami, 2004
  • Hurricane Katrina, 2005
Lesson 3: 

When Disaster Strikes, What Can Government Do?

  •  incentives
  • rational choice
  • public choice theory
  • moral hazard
  • unintended consequences
  •  San Francisco Earthquake & Fire, 1906
  • Hurricane Katrina, 2005
Lesson 4: 

When Disaster Strikes, What Can We Do?

  • incentives
  • comparative advantage
  • competition
  • money
  • Federal Reserve system
  • San Francisco Earthquake & Fire, 1906
  • Asian Tsunami, 2004
  • Hurricane Katrina, 2005

This set of lessons is compatible with the sequence of content and skill development in a semester-based high school economics course, but it is not necessary to teach the lessons sequentially or as a complete unit.  Each lesson is designed to stand alone and can be useful in a variety of curricular contexts.

A note of definition and a caveat about what the unit is not are in order here. We have defined natural disaster to include those sudden, non-man-made events that result in widespread loss of life or damage to property.  Hurricanes, earthquakes, volcanic eruptions, tsunamis, uncontrolled fire, and pandemics are natural events in our categorization – although we readily acknowledge that it is often possible and even appropriate to argue that humans play a role in the magnitude of the disaster’s impact.  Our definition allows us to exclude – and perhaps leave for another project – man-made disasters in the form of war, genocide, or even the long-term subjugation of peoples under repressive governments. The caveat is that these lessons do not intend to address the issue of disaster prevention. Our focus is on the effect of and response to disasters as they are illuminated by the tools of economic reasoning.

Disasters can be studied as natural experiments that generate data on how economies react to extreme stress.  While economic analysis of the data may provide lessons on how to cope with future instances of stress, it also helps to refine our understanding of how economies operate in normal circumstances. Some of the earliest studies of economies in disaster were undertaken in the 1950s and 1960s by the RAND Corporation, a think-tank for the U.S. military interested in the newly emergent possibility of nuclear disaster.  Jack Hirshleifer worked for RAND as a young economist and maintained his interest in disaster economics throughout his subsequent academic career at UCLA.  In 1987 he published a classic work, Economic Behavior in Adversity, surveying and compiling the foundational knowledge of the economics of disasters. The introduction to Economic Behavior in Adversity offers a succinct summary of established scholarship on disaster-related behavior.  It is excerpted, at length, below.

 From “Disaster and Recovery: An Historical Survey”

“Historical disasters may be divided into two categories according to geographical extent:  localized and generalized. A localized disaster is usually due to some specific event:  tornado, explosion, air raid, and so on. Though geographically limited, it may be very violent or intense, as when the town of St. Pierre on the island of Martinique, with all its 30,000 inhabitants, was wiped out in minutes by the 1902 eruption of Mt. Pelée. Localized disasters are typically sudden in their onset. Historical generalized disasters covering entire societies have been caused by complex social phenomena such as war, famine, revolution or pestilence.

. . . For localized disasters, we can probably now say that the crucial socio-psychological phenomena are well understood, including the immediate and delayed reactions of the victim population, the established leadership, host populations in case of evacuation, and so on. . . .

. . . In general, for any disaster it is useful to consider three zones of effect: the total destruction zone, the partially damaged zone, and the economically linked but physically undamaged support zone. . . .

Most studies of localized disasters have emphasized the psychological determinants of the behavior of the population . . . These determinants are not [the concern of economic analysis; however] . . . the typical psychological pattern of reaction to disaster is so well established that it is worth reviewing as a reliable input into analyses of the economic impact of disaster.

In general, it has been found that the ‘disaster syndrome’ displayed by a population suddenly struck by disaster does not include the wild, asocial behavior described by the more lurid popular writers on such themes.  Panic does not ordinarily occur.  Survivors first reorient and extricate themselves and then their families.  Some, even when seriously injured themselves, assist others.  If there is reason to fear another hazard (explosion, spreading fire . . .), there may be hasty flight.  All this is rational behavior.  Others seem to become temporarily stunned or apathetic, in which condition they will respond to direction but are incapable of independently useful action.  In the immediate post-impact period, a strong feeling of community identification is generated, promoting cooperative and unselfish efforts toward repair and relief activity.  Gradually, however, this stimulus wears off, after some days or weeks, and concern over unfairness of relief distribution and the like typically leads to considerable recrimination as a more normal society is restored.

A very marked psychological pattern, the ‘counter-disaster syndrome’, typically takes place in the support area outside the impact zone of the disaster.  The crisis calls forth an outburst of generous assistance, both personal and material, from this zone.  Volunteer rescuers converge on the disaster area; food and medicines are freely contributed; refugees are welcomed in reception areas.  For many smaller disasters, the material support has been so great as to exceed emergency needs.  Some time later, however, a reaction may set in, leading to bad relations between victim and support populations and accusations of ingratitude.

The effect of disaster upon community leadership and essential workers is interesting and important.  The conventional leaders may be wiped out by the disaster; but even if not, their effectiveness is at first limited by shock, communications breakdown, and loss of facilities and personnel.  Furthermore, within these limitations, leaders and essential workers may function poorly for lack of plans and training in how to deal with emergencies. One crucial problem is conflict between personal and public roles; leaders must worry about their own family needs as well as community needs. . . . Personnel who respond most effectively to the emergency are typically those with normal quasi-disaster functions, the army, the police, fire-fighters, and so on.

. . . Looking at matters now from the economic point of view, the urgent needs in the impact period are rescue, escape, fire-fighting, medical aid, and so on; in general, protection from physical hazards.  At first, most useful endeavours to these ends are necessarily unspecialized and uncoordinated.  The shattering of customary patterns and the breakdown of communications limit assistance to those in the immediate neighbourhood. However, some specialized organizations may spring rapidly into action: fire departments, hospitals, civil defence, utility repair services, for example. . . .

After the physical hazard abates, the relief phase begins. . . . In localized disasters, at least in the recent history of the western world, relief pours in so quickly and copiously as to preclude any substantial degree of what might be called ‘secondary mortality’ from exposure and starvation, though of course there will still be much suffering.. . . .

Finally, there is the recuperation phase in which measures are put under way to restore the economic viability of the damaged area. Here the most crucial needs seem to be utilities – communications, power, water, sewage, and gas – to permit industry to function once more and make the area habitable. Also vital are housing and restoration of transportation.”      (Hirshleifer, 7-11)

Hirshleifer’s summary gives us some useful labels:  The hurricanes, tornados, earthquakes, and catastrophic fires used as examples in the lessons of this unit are categorized as localized disasters – sudden, short-lived events.  Pandemics like the Black Death and the Spanish Flu are referred to as generalized disasters, although they may feel as sudden as tornados and earthquakes for those who are stricken. 

The other important point Hirshleifer makes for our inquiry is of the “extraordinary resiliency of human populations and social structures” in the wake of disaster. (Hirshleifer, 6) There is no shortage of historical evidence to support the contention that cities are “among humankind’s most durable artifacts.”  (Strupp, 2) 

  • In terms of economic activity, Chicago recovered from the Great Fire of 1871 in approximately a year and a half.   (Macaulay, 3)
  • Over a century later, in 1995, a massive earthquake struck Kobe, Japan, with similar devastation to that suffered by Chicago.  Economic activity in Kobe returned to normal in nineteen months.   (Macaulay, 3 and Phillips)
  • The April 18, 1906 earthquake and the three-day conflagration that followed leveled and essentially depopulated San Francisco. Despite the massive scale of destruction, “the rebuilding of the city was underway by the early summer of 1906.  Predictions that it would take at least a decade to erase all trace of the earthquake and fire and that ‘the earthquake will excite a certain prejudice against San Francisco, and indeed against the northern part of California, as a place for either residence or investment’ were quickly proven to be too pessimistic.  Just three years later, illustrated books were declaring the construction of the ‘new’ San Francisco essentially complete. . .” (Strupp, 10)

For an inquiring student the numerous examples of resilience must stand in stark contrast to those instances where disaster recovery stalls. As large sections of New Orleans languish two years after Katrina, the question of “Why the difference?” deserves some thought.

We and our students will continue to live in a world where catastrophic natural disaster happens. Economics, the study of decision-making under the constraints of scarcity, is all the more pertinent for examining these frequent occasions when nature contrives to tighten those constraints.  Lessons in The Economics of Disasters will help students develop the skills of economic thinking that will sharpen their understanding of human responses to past disasters and prepare them to meet those of the future.

Click for Catalog of Disasters Addendum


(see download file attached above)