The economics of flood insurance
The economics of flood insurance

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

Free course

The economics of flood insurance

3.4 Market failure and building on flood plains

In the case of developers building on flood plains, builders will consider the price they are able to sell a home for and decide how many homes to build (and where) in order to maximise their profit from supplying homes.

As you have already seen in Section 2.1, building and selling homes on flood plains can be an attractive option, because alternatives would be more costly (for example: building on more expensive land that is not prone to flooding; building on elevated land that is harder to access or get planning permission for; and so on). In Section 2.2 you saw that there may be a range of reasons why buyers might choose these homes.

Crucially, though, the developers are not basing their supply decisions on the full costs of these homes. They are escaping the cost of future flooding or flood-risk protection, which must nevertheless be borne by somebody. In economic terminology, there is a negative externality of production. The demand-and-supply model can help to demonstrate how this distorts the supply of housing causing more flood-risk homes to be built than the socially optimal amount, as shown in the slideshow in Figure 9.

Active content not displayed. This content requires JavaScript to be enabled.
Figure 9 Modelling the negative externality of building on a floodplain
Interactive feature not available in single page view (see it in standard view).

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371