Estimating The Ex-Ante Willingness to Pay for Flood Protection

Floods provide a useful example of risky events that span a range from small to catastrophic. In such circumstances the economically preferred measure of the benefits is based on an ex-ante measure that takes into account a person’s willingness to pay to avoid variability in their income or wealth. An analytical structure is developed to estimate the ex-ante value based on an adjustment factor to the estimated damage should an event occur. Research has shown this adjustment can be large for individual outcomes. The probability and damage from events are analyzed and expected values are estimated for the case of Baltimore City using a flood model developed by the Federal Emergency Management Agency. The transformed probability of an event based on exceedance probability estimates is derived. The results suggest that an ex-ante adjustment in this case leads to moderate but not dramatic increases in willingness to pay. The ex-post expected value is about $320 million per year to completely avoid flood damage. The values chosen for the base case ex-ante alternative increase willingness to pay by about 40 percent, a value which can be increased with higher risk aversion, reduced by a higher level of wealth, and is essentially unaltered by extending the upper limits of integration.