A General Rationale for a Governmental Role in the Relief of Large Risks
The government often provides relief against large risks, such as disasters. A simple, general rationale for this role of government is considered here that applies even when private contracting to share risks is not subject to market imperfections. Specifically, the optimal private sharing of risks will not result in complete coverage against them when they are sufficiently large. Hence, when such risks eventuate, the marginal utility to individuals of governmental relief may exceed the marginal value of public goods. Consequently, social welfare may be raised if the government reduces public goods expenditures and directs these freed resources toward individuals who have suffered losses.
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A data appendix is available at http://www.nber.org/data-appendix/w20192
Document Object Identifier (DOI): 10.3386/w20192
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