Natural disasters and its effect on the affected countries.

http://www.bbc.co.uk/news/science-environment-19254685

When a natural disaster occurs within areas prone to disasters, economically they need to spend a lot of money in order to re-establish the area and protect it from future disasters.

The price elasticity of demand refers to the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying remains the same. Demand itself can be elastic, inelastic or unit elastic. If the quantity of a good demanded does not change when the price changes, the price elasticity of demand is zero and the good has a perfectly inelastic demand.

This graph shows a perfectly inelastic demand.

Within an area that has been affected by a natural disaster, the government would have to spend a lot of money in order to maintain the affected area and to sustain the other areas which haven’t been affected. We must take into account that many people have lost homes, crops and means of transportation have been made scarce by the disaster, so the people will rely greatly on the government to help them. The people who have been injured would need medical attention and this will have to be done through the government who will allow helicopters to go around the affected area in order to help. This costs money, as people have to be paid to provide these services and these means of transportation are not cheap.

In areas such as Japan as much as US$210 billion was spent after the tsunami hit them in 2010. People would demand more and the price for these items would have gone up due to the limited amount made available. The sellers from outside regions could sell their products to the people in the affected area at a higher price because they are catering for an area outside their usual working domain and because they have to cultivate more than they normally do to provide for these people. This would lead to the momentary supply being perfectly inelastic as the quantity supplied immediately following price change remains constant.

However, if there was a rise in income goods which are considered luxuries to some such as coffee, there may be a group of people who are willing to exchange the coffee for tea as tea is cheaper. This is turn  would mean that coffee is an elastic good because a raise in price will cause a large decrease in demand as consumers start buying more tea instead of coffee.

Many people would have to stop working due to accidents caused by the disasters which would mean that people would have to stop working for a while and recover; this would come to mean that people be using their savings in order to take care of themselves and this would be seen as an expense. There would therefore be an increase in demand for medical supplies. Income elasticity of demand would measure how the quantity demanded of the medical supplies would respond to a change in income with other things remaining the same. Since there is no increase in income, people will have no choice but to lower their demand for some products as they may not afford it in order to be able to recover. Therefore there will be an elastic reaction in demand.

The disasters will cause market failure to occur as social cost of production to exceed private cost. It would lead to the government having to deal with matters of health care and education causing the social benefit of consumption to exceed the private benefit.  

Market failures occur due to under or over production which arise when there are price and quantity regulations, taxes and subsidies, externalities, common resources, monopoly and high transaction costs.  For example, climate change can cause the natural disasters to occur and because of that it can cause market failure due to under and over production in competitive markets. Hence the people have to be educated on how to keep the environment clean. This is when the government will step in. 

Depending on the government’s budget after redeveloping the affected areas, taxations on goods could be implemented together with trading and regulations. The government has to create policies and new technologies which are eco-friendly and educate the people about what harm their products have on the environment and how it can be mended. In For example some goods would have to reach the standard appropriate to that demanded by the government or else companies would be fined.

To conclude, as seen above, the demand of a good can vary on many factors such as income and the supply available. It can be seen as a price elastic demand when there is a substitute, whereby when prices get too high for one good, the people can move to another similar good which is at a lower price. Income also has a role to play in the sense that if it does not increase but the price of the product increases, the amount that someone could afford of that product decrease which in turn causes that person to change product altogether to one cheaper.

In some cases however, although the price increases the quantity demanded will stay the same because the product could be seen as irreplaceable and hence, no matter how high the price of the good will rise, the consumer will still buy the product.

Market failures can also occur as a result of natural disasters due to under production. This will cause the government to think of incentives in order to educate the private companies in ways to have a more eco-friendly outlook and to get them more involved in environment protection. This in turn will not only benefit the government but can also reduce the effect of natural disasters. 

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