When paternalism leaves a community more vulnerable
As climate change increases flood hazards, fire hazards, and hurricane intensity, insurance prices will rise, too – unless we're 'protected' from the information.
In Climatopolis, I present a microeconomist's vision of how our cities will adapt in the face of climate change. I argue that a Homer Simpson does not have to have perfect foresight if for profit firms such as insurance companies send him price signals. Intuitively, if climate change raises the risk of fires in a specific area, then profit maximization and insurance industry competition will lead to insurance rates rising in those fire zones and this will lead fewer households to live there and those that live there will build their homes out of materials that are more likely to withstand fires (so they can be quoted a lower insurance rate).Skip to next paragraph
Mathew is an economics professor at UCLA and has written three books: Green Cities (Brookings Institution Press); Heroes and Cowards (Princeton University Press, jointly with Dora L. Costa); and in fall 2010, Climatopolis: How Our Cities Will Thrive in the Hotter World (Basic Books).
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So far, so good. I have assumed that new information about new risks posed by climate change would become public knowledge as local officials and insurance companies would create updated risk maps and distribute them. But, this San Marcos case study highlights the suppression of evidence!
"San Marcos city officials kept secret a color-coded map showing the risk of wildfire danger to various neighborhoods for fear insurance companies would use the information to justify raising rates or dropping policies, according to a newspaper report. Officials opted to circulate a version of the map that omitted the marking of Coronado Hills and neighboring Attebury as deep red, which signifies “extreme wildfire hazard,” city leaders told The North County Times. Shadings showing five other neighborhoods with “very high” risk were also left off the map. The map that was released showed all wildfire areas in a uniform shade of green.
The maps were produced after a study commissioned by San Marcos in 2005 to assess wildfire risks for the city’s communities."
There is a clear conflict of interest here. An adaptation economist such as myself wants "new news" of risks to be discovered and disseminated. The City was clearly trying to protect the pocketbook of existing home owners by not having them pay higher insurance rates. Given that property tax revenue is a fixed % of the total value of local land, the city may have worried that its total tax revenue would fall with the new news.
Economists know that information is a public good. The Obama Administration should invest in a "Google Earth" project for every parcel of land to delineate the risks its faces and post this on a national website. This would circumvent any conflict of interest problem. In this San Marcos case, there is a clear conflict of interest. The people of this city would not allow the insurance industry to create their own maps because they would claim that there is an incentive to lie and over-state the risks in areas in order to justify high insurance prices.
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