Application of Economic Analyses to Hurricane Warnings to Residential and Retail Activities In the U.S. Gulf of Mexico Coastal Region

Abstract

Hurricane warnings cause people and businesses in the predicted path of the cyclone to take actions that will reduce damage and/or loss of life. Sometimes these actions and their attendant costs are avoidable, since a larger section of the coast is alerted than that which the hurricane actually affects. Using general population densities and the average damage costs due to storms, the authors present a combined game- and decision-theory approach to estimating the economic benefits of more accurate prediction. The potential savings to this economic sector for a substantial improvement in 24-hr forecasting accuracies (that is, the reduction of the average forecast error to one-half its present value) is shown to be at least $15.2 million in the first year. A general equation is presented for various combinations of improvement levels, population densities, percentage of those who protect, and number of warnings per season.