The World Trade Center attack underscored the urgent need to assess vulnerabilities in the security of American lives and property and to implement preventive measures against catastrophic events. As policymakers grapple with strategies for dealing with homeland security challenges, a key issue they face is determining when private sector security activities or government interventions are most effective in promoting national security. We argue that in many private sector settings, a combination of regulations, insurance, and third party inspections offers the most auspicious approach to improving security at reasonable economic cost.
To see why the private sector may lack adequate incentives to protect against terrorist attacks, consider airline security, a continuing vulnerability in America today despite recent improvements. Airline security is a complex, interdependent arena in which it is clear that security measures will be effective only if a coordinated system can be implemented. Diligent passenger and baggage screening has been, and continues to be, an effective deterrent to airline catastrophes. But the high cost of x-ray and explosive detection equipment has discouraged or precluded some airlines from using them as standard safety tactics. And if pure cost alone is not enough to deter a company from making this costly security investment, the knowledge that other airlines are not making the investment can clinch a decision not to proceed with it.