Economic analysis of the costs of flooding

Abstract

The pecuniary and non-pecuniary social costs of flooding are analyzed, and are illustrated with results from a simple macroeconomic model calibrated to have damage and other characteristics similar to those observed in recent Canadian flooding. Pecuniary costs include relief and cleanup, capital damage and net output loss. Net output loss tends to rise in relative importance with the length of recovery and, as a result, also increases with capital damage if it causes recovery to take longer. Capital damage is larger than output loss here, as in previous studies. Distributional and insurance aspects are also examined. Reliance on federal disaster assistance creates moral hazard both for individuals and lower levels of government. Wider private insurance coverage and the introduction of a significant premium for public flood insurance are recommended.