Pay now, or pay later?

OPPORTUNITY COST

PRESENT VALUE

Two definitions need to be made at this point:

Opportunity cost: the opportunity cost of a resource is the cost of its next best alternative. A person engaged in mopping up a flood would usually be employed in some other job. The opportunity cost of mopping up is the foregone value of the work he or she would otherwise have done. Or seen another way, the funds expected to pay for clean-up should not be spent on something else.

Present value: All things being equal, money available for productive investment now is worth more than money available for productive investment sometime in the future.

An overriding choice facing a government is whether to spend now on preparedness or mitigation or, possibly, spend later on disaster recovery. Usually governments choose a mix of preparedness/mitigation and recovery programs.

The key questions in this choice are:

“ What are the opportunity costs of investing in preparedness and/or mitigation?”

“ Is the present value of the future loss higher or lower than the cost of investing in preparedness and/or mitigation?”

One basic principle affecting the choice is that spending on preparedness and mitigation should be less than the present value of the expected losses which would be averted by the preparedness/mitigation measure.