Seaport investments in capacity and natural disaster prevention

Abstract

Most seaports face constraints in financial resources to some degree, and thus need to balance the investments in capacity and natural disaster prevention. On the one hand, due to budget constraint, limited resources need to be allocated between the two tasks. On the other hand, the benefit of natural disaster prevention investment is likely to be higher for ports with larger capacity. This study builds a stylized analytical model to examine the managerial and policy implications of such interactions between the two counteracting mechanisms. We find that the port managers would always prioritize capacity investment over natural disaster prevention investment. Social welfare maximizing ports invest more in both capacity and disaster prevention than those chosen by profit maximizing operators. However, compared with profit maximizing ports, welfare maximizing ports also require a larger budget to justify the investment in disaster prevention. Moreover, with increasing intensity of natural disaster, a port’s capacity investment decreases and its disaster prevention investment increases, irrespective of its objective. The magnitudes of both changes are larger for welfare maximizing ports than for profit maximizing ports.