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by Don Boudreaux on October 31, 2013

in Environment, Other People's Money, Reality Is Not Optional, Risk and Safety, Seen and Unseen, Subsidies

Here’s a letter that I sent to U.S. Senator Robert Menendez (D-NJ):

Dear Sen. Menendez:

NPR reported yesterday on your opposition to eliminating subsidies for flood-insurance premiums.*  You correctly note that eliminating these subsidies will cause insurance premiums to rise for residents of flood-prone locations.  But you incorrectly predict that this rise in premiums will be a “man-made disaster.”  The reality is the very opposite of what you predict.

Man-made disasters are created by the artificially low premiums that you advocate.  Subsidized premiums encourage the over-population of flood-prone regions, as well as discourage residents of those areas from taking appropriate care to protect their properties from flood damage.

Allowing these premiums to rise to unsubsidized levels would – by encouraging people to make more prudent decisions regarding where to live and about how to protect their properties – reduce both the property damage and the number of fatalities caused in the future by storms, heavy rains, and swelling rivers.

There are few better sources of man-made disasters than subsidized insurance rates.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* “In Sandy’s Wake, Flood Zones And Insurance Rates Re-Examined,” Christopher Joyce reporting.

Here’s a serious question for all those Scholars out there who are eager to entrust politicians with the task of correcting market failures (as such failures are identified in economic theory): If a U.S. Senator in 2013 gets such a straightforward, simple, and elementary matter as the above wrong, why in the world do you have confidence that he and his ilk will be wiser and better informed on other matters?  Here, after all, is a high-ranking government official who is advocating – proudly! – policies that promote the very sorts of outcomes that policies meant to correct market failures are aimed at preventing.  Is such a person to be trusted, say, to impose legislated minimum wages in ways that correct the alleged market failure of monopsony power in the market for low-skilled workers?  Hardly not.  To suppose that he and his comrades are interested in, and capable of, implementing policies along the lines suggested by welfare economics is the height of naiveté.

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