According to today’s AP headline “Central U.S. staggers from storm punches. Ohio

Question

According to today’s AP headline “Central U.S. staggers from storm punches. Ohio latest area to see new flooding; death toll reaches 21.” This brings up the issue of federal flood control policy. In order to combat the problem of flooding, throughout the 20th century, the U.S Army Corps of Engineers (funded by the federal government) built and maintained an extensive system of locks, dams, and levees on the Mississippi and Missouri Rivers, which drain most of the United States, east of the Rockies.

Why did the government need to get involved in the building of flood control structures? (i.e. why did the private market fail to provide a sufficient amount?) Demonstrate and explain.

Is it likely that the federal government is currently spending the optimal amount on flood control structures? Why or why not? Explain.

To help victims of flooding recoup their financial losses, the federal government subsidizes flood insurance and low-interest rebuilding loans. How ill such policies affect the rebuilding decisions of flooding victims? How will this affect the amount of property damage done the next time there is a flood in the same place?

Explanation / Answer

Since building of flood control systems is a public good and the private markets will not able to obtain profits from building these structures, thus government has to intervene in building these structures. Private markets are profit maximizer and will not be able to provide optimal amount of the flood control system, thus government has to intervene for optimal allocation of the flood control system.

It might not be likely that the federal government is currently spending the optimal amount on flood control systems because of the problem of free ridership in case of public goods where the consumers are not willing to share their true marginal contribution in the provisioning of the good which leads to less than optimal allocation of the good.

Subsidization by the government will increase the rebuilding decisions of flooding victims and they will not move towards construction of safe homes. This will reduce the amount of property damage done the next time there is flood in the same place.

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