Here in Oxford, there is water everywhere. Yesterday, the main road into town (Abingdon Road) was closed due to flooding, and the cost to business and householders will be quite significant. There is a danger of even worse flooding to come. In one sense, it is an act of God. No one can do anything about the weather, but flooding is becoming an increasing problem, and many want the government to intervene to improve flood defences.
Flood defences are in many ways a classic example of a public good.
They have two characteristics of public goods.
- Non-excludability. Once you provide flood defences for a city, everyone in that city will benefit and be protected. (People will be protected whether or not they have contributed towards the cost).
- Non-rivalry. If you enjoy a city defended from rising floodwaters, it doesn’t reduce the number of flood defences for other people. (It’s not like eating emergency rations, which do reduce the amount available for other people.)
Failure of the free market
- Difficulty in provision. There is little, if any, incentive for a firm to provide flood defences through charging local residents. There is a big free rider problem. People on flood plains may have a vested interest in better flood defences, but there is a temptation to avoid paying and hoping someone else will pay.
- Another difficulty is that flooding has no predictability. Building roads (a quasi-public good) gives a predictable return. Spending money on police and justice also give a predictable return. But, you could spend millions on flood defences and not need it for 30 years.
- Another difficulty is that flood defences can be quite difficult to build. Dredging rivers done annually is expensive, though at least manageable. But, other flood defences may be more difficult, such as building relief canals to take excess water. This may need government help to purchase the necessary land.
Occasions where public good can be provided by the free market
Despite the limitations of public goods, it is still possible local residents may club together in a spirit of solidarity to provide local flood defences. Many of the floodings in England is along the affluent banks of the River Thames. Many of these householders are wealthy and their property is worth a lot (or at least was worth a lot). It is easier to create a private initiative if there are many wealthy people involved, as they will have more spare cash to pay for flood defences, and also they have a bigger vested interest in defending the value of their properties. If the floods affected the rented property of low-income workers, it would be much harder to provide flood defences. But, these local initiatives may be limited as many flood defence projects require very substantial capital investment.
At a local level, parish councils or local authorities may be able to pay for certain amounts of flood defences.
The role of the government
Flooding has significant economic costs:
- The personal cost of those stressed by flood levels
- Economic cost of business not being able to trade normally
- Transport links adversely affected hitting productivity
- Higher insurance premiums for everyone. Because we have not paid for flood defences, the whole country will be paying higher insurance premiums to pay the cost. It would be cheaper to have paid for flood defences and not the higher insurance costs.
- Loss of property value for those living in flooded areas.
This makes a clear case for the government to spend money on flood defences and pay for it out of general taxation.
Evaluation of government spending
- There is a danger of moral hazard. If the government promise to secure all land from flooding, it may encourage people to build and move onto flood plains. If people wish to live on flood plains / near rivers, arguably they should be prepared to pay part of the cost.
- Many of those affected by the floods are relatively more prosperous than the rest of the country. There is an argument about limiting the transfer of funds from the average taxpayer to wealthy homeowners living by the River Thames.
- But, it should be remembered flooding doesn’t just affect rich people with mansions on the Thames – it is a rather lazy generalisation. I know every income bracket in Oxford is being hit by flooding.
Flooding and austerity
In the political blame game, some are criticising the government’s policy of austerity. In a recession, government capital spending would help increase aggregate demand and boost economic growth. Spending on flood defences is exactly the kind of ‘shovel ready’ projects which the government could have been spending on – rather than cutting spending. The capital spending would not only increase aggregate demand but help boost productivity by avoiding lost output and economic activity due to the flood damage.