For instance, they observed, the best policy regarding floods would be to simply disallow all construction in a floodplain, or at least forswear any public financial assistance to people who do build there and subsequently have property damaged by a flood.
However, such a promise cannot be kept: the political pressures to help victims will be too great to resist. What’s more, people recognize that reality, so they fail to heed the government warnings and build in the floodplains anyway, which in turn forces the government’s hand by putting it in a situation where it finds itself obligated to provide assistance after a flood.
And given that we have development along floodplains across this country, from Miami Beach to the Illinois river in Mossville, it has become inevitable that we will repair and rebuild those communities when they’re damaged by a flood, as well as spend money to prevent flooding from occurring in the first place.
That reality is a main reason that we have a National Flood Insurance Program, and why it is $24 billion in the hole — a number that’s undoubtedly about to rise precipitously. The government did not intervene in the flood insurance market because the markets failed: the property and casualty insurers priced its insurance above what people wanted to pay for it, and the government stepped in to sell it at a price that homeowners would pay, which subsequently entailed it taking billions of dollars of losses. These same insurers are anxious to sell flood insurance policies today, but homeowners would — naturally — prefer to get a subsidized price from the government.