Most people seem to be expecting floods along the Red River and the Assiniboine River in Manitoba this spring as the meltwater in the northern midwestern US states and in Manitoba from the winter's heavy snows leads to huge run-offs [h/t Ms. Eclectic]. The floods sound as if they might be tragic and might cause considerable loss, and so the Manitoba gubmnt is already making preparations for flood control and flood relief.
What really astounded me about the story cited above, though, is that people continue to live and farm in these areas AND expect the Manitoba gubmnt to help bail them out both figuratively and literally.
One of the people fearing what's to come in the spring is Mary Elizabeth McKenzie, who for nine years has lived with her husband on a farm south of Winnipeg.
It seems they are always either preparing for a flood or cleaning up after one, she told CBC News.
"I've lost the ability to live my life the way I choose it," McKenzie said.
She said she's lived through 11 floods and in five of them has had to evacuate a number of animals from the farm.
She has lived through 11 floods in nine years?? And she still chooses to live there?
What if the people living along the river flats absolutely knew the gubmnt would not bail them out? What might they choose to do differently?
- Some would search for private flood insurance. But surely private flood insurance would have very high premiums for homes and farms that were constantly in jeopardy. In addition, the insurers would be reluctant to provide coverage for certain types of especially high possible losses [chicken farms come to mind as a possible example because of the high costs of trying to evacuate all the chickens].
- Others, not wanting to pay the high premiums for private flood insurance, would move elsewhere to live or farm.
- Still others would form local co-operatives to build levies or dykes along long stretches of the rivers in flood-prone areas.
- And some would refocus their farming to emphasize activities that are less likely to be harmed by intermittent semi-regular flooding.
But with the provincial gubmnt providing flood control, flood relief and loss compensation, many people like the one quoted above end up choosing to take on more costly risk than they otherwise would. Provincial taxpayers bail them out and pick up some of the costs of the risk; but these same people get to keep the gains from taking the risks if the floods do not materialize or are not so serious. Not only do they not bear all the costs of their decisions, but they take on more risk than they would if they did have to bear those costs.
Unless I'm missing something, this reads like a classic example of moral hazard:
Moral hazard occurs when a party insulated from risk behaves differently than it would behave if it were fully exposed to the risk.
Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. For example, a person with insurance against automobile theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company.