Efficiency and Equity in Urban Flood Management Policies : A Systematic Urban Economics Exploration

Flood exposure is likely to increase in the future as a direct consequence of more frequent andmore intense flooding and the growth of populations and economic assets in flood-prone areas. Low-income households,which are more likely to be located in high-risk zones, will be particularly affected. This paper assesses the welfareand equity impacts of three flood management policies—risk-based insurance, zoning, and subsidizedinsurance—using an urban economics framework with two income groups and three potential flood locations. The paper showsthat in a first-best setting, risk-based insurance maximizes social welfare. However, depending on flood characteristics,implementing a zoning policy or subsidized insurance is close to optimal and can be more feasible. Subsidizinginsurance reduces upward pressure on housing rents but increases flood damage, and is recommended for rare floodsoccurring in a large part of a city. Zoning policies have the opposite effect, avoiding damage but increasing housingrents, and are recommended for frequent floods in small areas. The social welfare impact of choosing the wrong floodmanagement policy depends on the location of floods relative to employment centers, with flooding close to employmentcenters being particularly harmful. Implementing flood management policies redistributes flood costs between high-and low-income households through land markets, irrespective of who is directly affected. As such, they are progressivein terms of equity, compared to a laissez-faire scenario with myopic anticipations, in the more common scenario wherepoorer populations are more exposed to urban floods. But their impacts on inequality depend on flood locations andurban configuration. For instance, in a city where floods are centrally located and low-income households live in thecity center, subsidized insurance would mitigate a surge in inequality, whereas a zoning policy could substantiallyincrease inequalities.