Ex post Risk Management of Environmental Contamination on Municipal Water

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Other Title
  • 環境に由来する飲料水質汚染リスクの事後的マネジメント
  • カンキョウ ニ ユライ スル インリョウ スイシツ オセン リスク ノ ジゴテキ マネジメント

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Abstract

This study provides ex post risk management system on municipal water, which is faced with stochastic environmental contamination. Water contamination is caused by, for example, detrimental organic compound derived from soil and underground water and germ from stockbreeding. We have difficulty in predicting occurrences, probabilities and severity of such contaminations. For this sort of contamination risk, ex ante risk management system by regulation and protection is limited in effectiveness, because such unpredictable features prevent the relevant control bodies from internalizing the externality of pollution in advance. Therefore, complementary ex post risk management measure is thought to be needed.<br>Cost which becomes obvious afterward is classified into three categories. The first is the consumer cost: the cost of recovering the damage of health and restriction on water use. The second is the firm cost: the cost of building a purifier and compensating for people in polluted area. The last is the public cost: the cost of taking measures for the contamination caused by natural phenomena or unspecified sources.<br>Our goal in this paper is to examine risk sharing system for the recovering costs of municipal water contamination and to consider its implication from the point of view of efficiency in resource allocation.<br>According to “Polluter Pays Principle”, the cost of consumer could be converted into the second-type cost; if a polluter is specified, the polluter should compensate for the consumers' losses. However, if the polluter is not be able to specified because of complexity of exposure route or causal relationship between detrimental factors, governmental body may need to give them financial assistance. Thus, we develop the model of risk sharing systems for these costs; a kind of pollution insurance system for regional public sectors which supply municipal water.<br>In the model based on the contract theory, optimal condition for the insurance contract are investigated, which determine the rule for efficient level of insurance and investment level in purification system. Applying the standard analytical process for the asymmetric information to the model, we have an implication that the investment level for purification system and insurance distributed could be supplied excessively when the level of contamination at each region is private information of the regional body. The conditions which cause the oversupply of the system and the allocation of insurance are interpreted that the system is thought to be effective against the contamination. Moreover, the incentive for the regional bodies to offer the overestimated level of the contamination could be interpreted as inevitable when the predictability of the occurrence of contamination is limited due to its stochastic nature. Considering that the inefficiency associated with the contamination risk sharing system could be serious, the efficiency of the risk sharing system should be compared with the implication of other ex post allocation systems.

Journal

  • Studies in Regional Science

    Studies in Regional Science 34 (3), 275-287, 2003

    JAPAN SECTION OF THE REGIONAL SCIENCE ASSOCIATION INTERNATIONAL

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