Optimal management of the flood risks of floodplain development.

This paper presents a model of the problem on floodplain development, exploring the conditions that are both necessary and sufficient for development to be optimal. The model is calibrated for a particular catchment, the Ouse catchment in the United Kingdom, and is used both to estimate the expected impact of floodplain development and to explore the impact of alternative policy instruments. We find that the use of price-based instruments that signal the expected flood damage cost of floodplain development has the potential to lead to outcomes close to the social optimum. The finding is robust to two types of uncertainty: model error about the relation between precipitation and flood-risk and measurement error about the benefits of developed floodplains.