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Market Failure in Information: The National Flood Insurance Program

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  • James Chivers
  • Nicholas E. Flores

Abstract

The National Flood Insurance Program (NFIP) was established in 1968 and requires mandatory flood insurance for property owners who have federally backed mortgages. Krutilla (1966) noted that a compulsory national flood insurance program could greatly improve the economic efficiency of flood plain occupancy in the United States. However, in order to realize the efficiency gains suggested by Krutilla, property owners must have sufficient information about flood risk and insurance premiums to make well-informed home purchase decisions. Using survey data from Boulder, Colorado, we find significant evidence of market failure in information in the NFIP program. The majority of survey respondents, all of whom live in a special flood hazard area, report they did not fully understand the degree of flood risk or the cost of insuring against this risk when negotiating the purchase of their property.

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Bibliographic Info

Article provided by University of Wisconsin Press in its journal Land Economics.

Volume (Year): 78 (2002)
Issue (Month): 4 ()
Pages: 515-521

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Handle: RePEc:uwp:landec:v:78:y:2002:i:4:p:515-521

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Web page: http://le.uwpress.org/

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Cited by:
  1. Sarmiento, Camilo & Miller, Ted E., 2006. "Inequities in Flood Management Protection Outcomes," 2006 Annual meeting, July 23-26, Long Beach, CA, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 21042, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. Ellen Hanak & Georgina Moreno, 2008. "California Coastal Management with a Changing Climate," PPIC Research Reports, Public Policy Institute of California, Public Policy Institute of California, number coacli.
  3. Bagstad, Kenneth J. & Stapleton, Kevin & D'Agostino, John R., 2007. "Taxes, subsidies, and insurance as drivers of United States coastal development," Ecological Economics, Elsevier, Elsevier, vol. 63(2-3), pages 285-298, August.
  4. Bin, Okmyung & Landry, Craig E., 2013. "Changes in implicit flood risk premiums: Empirical evidence from the housing market," Journal of Environmental Economics and Management, Elsevier, vol. 65(3), pages 361-376.
  5. Hallstrom, Daniel G. & Smith, V. Kerry, 2005. "Market responses to hurricanes," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 541-561, November.
  6. Julie Mueller & John Loomis & Armando González-Cabán, 2009. "Do Repeated Wildfires Change Homebuyers’ Demand for Homes in High-Risk Areas? A Hedonic Analysis of the Short and Long-Term Effects of Repeated Wildfires on House Prices in Southern California," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 38(2), pages 155-172, February.
  7. Shaw, W. Douglass & Woodward, Richard T., 2008. "Why environmental and resource economists should care about non-expected utility models," Resource and Energy Economics, Elsevier, Elsevier, vol. 30(1), pages 66-89, January.
  8. V. Smith & Jared Carbone & Jaren Pope & Daniel Hallstrom & Michael Darden, 2006. "Adjusting to natural disasters," Journal of Risk and Uncertainty, Springer, Springer, vol. 33(1), pages 37-54, September.

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