Paying for flood defences – an example of the public good problem?

At some point during each year everyone studying microeconomics will come across the idea of public goods, usually in connection with market failure.  The concept is pretty simple; a public good is non-excludable.  This means that people can benefit from the product or service whether they have paid for it or not.  This means that nobody pays for it as they will wait for everyone else to do so, allowing them to benefit for free.  This is known as the free-rider effect and means that the product or service is never provided.

So much for the theory.  Examples of public goods tend to revolve around things such as national defence, lighthouses and flood defence.  As you may have noticed, flooding is very much in the news and large numbers of people have recently been adversely affected by flooding, in some cases very adversely.  Understandably they are keen that more flood defences are provided, but who should pay for them?

As a public good it is clear that taxes need to have a key role in this.  If individual households are asked to voluntarily pay then each will refuse, reasoning that if all the other households in the flood risk area agree to pay then they can benefit from the defences for nothing as the defences are non-excludable.  As everyone thinks this then no money will be collected and no defences will be built.  Some kind of tax is needed, but who should it be extended to?  Just the people in the flood risk area?  Everyone in the country?  The government has considered this problem and come up with an idea related to council tax, which is a tax paid to local authorities by residents of an area based, very roughly, on the value of their houses.  This article from the Daily Telegraph explains:

http://www.telegraph.co.uk/news/earth/flooding/12123738/Homeowners-living-in-flood-hit-areas-face-higher-council-tax-bills.html

The question which the government needs to consider is simple.  Who pays for the flood defences and how much?  It will be interesting to see how this develops.

 

 

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