Economic Cost is the calculated amount of money that would be lost by a firm due to a disaster or economic breakdown caused by natural disasters. A breakdown in economic activity is a direct result of natural disasters. The damages caused to a firm are measured in terms of monetary terms and are termed economic cost. Economic cost is frequently used by economists as a means to assess the prudence of a planned course of action with respect to that of an alternative course of action.
Natural disasters such as earthquakes, floods, hurricanes, drought etc can significantly affect a country's economy in a negative way. In such cases, the immediate economic impact is passed over to the next generation who will have to face the consequences of the disaster. It is for this reason that governments allot a considerable amount of public funding for rebuilding and repairing infrastructure. Since natural disasters do not occur very often, the amount of economic cost incurred due to such disasters is relatively small. Still, the total cost of rebuilding the infrastructure can be far higher than the actual cost of damages inflicted on the firm.
Total economic cost cannot be determined since the total economic cost would depend on the severity of the damage caused to the firm. A large company may be incurring a large economic cost due to the damages caused to its plant and machinery. However, the same firm could incur a smaller economic cost due to the fewer number of customers it services. In order to ascertain the economic cost of a particular activity, an estimate of the damage caused to the firm and an estimate of the revenues generated from that activity are needed. Estimates of the damage caused to the firm and its ability to service the debts of the firm are made by experts who specialize in these activities.
Economically speaking, estimating the damages and their subsequent revenue generation is easier when the damages are known in advance. In this case, the firm can perform in-depth cost analysis before estimating its costs. The cost analysis can be performed for different types of activities and can be done for all relevant enterprises irrespective of their nature. The total cost of a specific activity can be derived when one takes into consideration all of the factors affecting the firm's revenue generation.
When estimating the cost of particular damages, it is essential to keep some things in mind. One should consider the firm's financial position and the extent to which its activities have affected the firm's balance sheet. Some firms may lose a lot of money in one hit but recover quickly from the other. Other firms might sustain heavy losses but recover slowly over a period of time. In such cases, it is not possible to make an exact estimate of the firm's potential recovery. However, it is still possible to estimate the probability of the firm making recoveries from its current level of activity.
Economic cost can also be defined as the total monetary outlay, less any future earnings of the enterprise, less any capital assets that could be retained by the firm, less any obligations existing or future to third parties such as rent, utilities, maintenance, taxes, etc. If we take the example of a car accident, the economic cost will be the repair cost less any future income from that activity. This can be further broken down by identifying the activity and its potential impact on the firm's customers. Finally, we can include the economic cost of any potential future claims by the customers against the firm.
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