The externalities of levees: an upstream levee is a downstream flood

Germany is underwater these days. In particular the North of the country is now faced with floods of rare magnitude as after days of agony, during which most of the levees held, one of them along the river Elbe did break. The externalities of levees are almost of textbook quality: Every upstream levee that holds sends more water to the levees downstream hence imposing a higher flood risk. Pricing flood insurance would certainly be an interesting problem for insurance actuaries but also for the state: downstream communities should have a say when upstream levees are reenforced.  An idea could be to build buffers in every levee which can be flooded in a controlled way to avoid large disasters downstream.


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