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 and more 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 welfare and equity impacts of three flood management policies—risk-based insurance, zoning, and subsidized insurance—using an urban economics framework with two income groups and three potential flood locations. The paper shows that 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. Subsidizing insurance reduces upward pressure on housing rents but increases flood damage, and is recommended for rare floods occurring in a large part of a city. Zoning policies have the opposite effect, avoiding damage but increasing housing rents, and are recommended for frequent floods in small areas. The social welfare impact of choosing the wrong flood management policy depends on the location of floods relative to employment centers, with flooding close to employment centers 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 progressive in terms of equity, compared to a laissez-faire scenario with myopic anticipations, in the more common scenario where poorer populations are more exposed to urban floods. But their impacts on inequality depend on flood locations and urban configuration. For instance, in a city where floods are centrally located and low-income households live in the city center, subsidized insurance would mitigate a surge in inequality, whereas a zoning policy could substantially increase inequalities.