Market Solutions to Large Number Environmental Problem-Induced Changes in Risk Distributions
Abstract
Climate change likely involves changes in risk distributions for extreme weather events. These changes increase uncertainty about where these events occur and their frequency. This differs from environmental issues that addressed pollutants that contaminated neighbors’ property or the need to restrain emissions to meet health standards. Effectively addressing changes in risk distributions requires different tools.
The problem of increasingly uncertain risk distributions is not new. The market response to such developments is to identify means of managing risks that (1) reduce the potential for catastrophe for individuals and firms and (2) develop the data needed to promote behavior changes to reduce the risks. Alternative risk transfer methods (ARTMs) are developing to do this. ARTMs facilitate entrepreneurial responses by encouraging investment in developing information that can enable entrepreneurs to identify opportunities. The chapter draws on economist Israel Kirzner’s analysis of entrepreneurship to explore this process, addressing the legal infrastructure necessary to facilitate harnessing ARTM to address the problems arising from the climate-change-induced changes in risk distributions for extreme weather events. It explores how the ARTM industry uses the data it develops to help insurance buyers modify behavior to reduce losses as form of market response to this class of environmental problems and how this fits with our understanding of entrepreneurial behavior.