The increased damage is due to building more on the flood plains, which brings economic gains. It is very possible that they outweigh the increased damage. Within standard economics, they should be, unless strongly subsidized insurance (or expectation of state help for the uninsured after a predictable disaster) is messing up the incentives. Then again, standard economics assumes rational agents, which is kind of the opposite of what is discussed in this post...
The straightforward way to force irrational homeowners/business owners/developers to internalize the risk would be compulsory but not subsidized insurance. That’s not politically feasible, I think. That’s why most governments would use some clunky and probably sub-optimal combination of regulation, subsidized insurance, and other policies (such as getting the same community to pay for part of the insurance subsidies through local taxes).
The increased damage is due to building more on the flood plains, which brings economic gains. It is very possible that they outweigh the increased damage. Within standard economics, they should be, unless strongly subsidized insurance (or expectation of state help for the uninsured after a predictable disaster) is messing up the incentives. Then again, standard economics assumes rational agents, which is kind of the opposite of what is discussed in this post...
The straightforward way to force irrational homeowners/business owners/developers to internalize the risk would be compulsory but not subsidized insurance. That’s not politically feasible, I think. That’s why most governments would use some clunky and probably sub-optimal combination of regulation, subsidized insurance, and other policies (such as getting the same community to pay for part of the insurance subsidies through local taxes).