In 2013, I lived in Calgary, AB when it was hit with its worst flooding in 100 years.
At the time, we lived in an apartment building in a higher part of the city and were unaffected by the flooding, but most of the downtown core and most neighborhoods near the Bow River were underwater and in large parts of the city thousands of homes were damaged.
Many smaller communities also had large-scale damage to houses to flooding. In the aftermath, many people realized that their insurance did not cover natural disasters and began to appeal to the government to compensate their losses, which they eventually received in a disaster relief program.
Houses were repaired, towns rebuilt, and life went on. Beyond the payments for uninsured damage, the municipal, provincial, and federal governments spent millions in the years after to try to protect against future flooding. In the small town of Canmore for example, the governments together spent a combined $48 million on “flood mitigation”.
As a result, taxpayers that live in safe, flood-free, areas were forced through taxation to pay to repair and safe-guard the homes of those in live in areas that have high risks of flooding (ironically one of the towns that were hardest hit and received disaster relief was named High River.)
It is obviously unpleasant and a massive time, emotional, and financial cost to be evacuated from a flood and have your house damaged, but the forced transfer of money from taxpayers in safe areas to homeowners in risky areas subsidizes bad decision making. The use of tax money to construct expensive anti-flooding methods to protect homes in risky areas is another example of the same thing.
This subsidization of risk is not just a Canadian flooding issue. It is an issue whenever the government gets involved in insurance.
Take earthquake insurance as an example. In a free market, insurance companies would be able to create policies that would be very expensive but would cover areas at high risks of earthquakes. They would be able to take into account the construction of buildings and create incentives for building owners to follow building codes and use the best methods possible to keep buildings up.
But that is not how it works most places. Instead, governments create policies to prevent insurances companies from “gouging” consumers and as a result, companies can’t price their product and make a profit, so they stop issuing insurance. Then the government has to step in and offer disaster relief. Since there are no insurance cost savings from building safer, builders don’t build as safe as they could, they simply do the minimum necessary to avoid liability issues.
The government stepping in to protect people from insurance companies end up making the safe builders subsidize the unsafe builders and as a result, everyone is less safe.
Whether is healthcare (where the healthy subsidize the sick), flooding (where homeowners on high ground pay for those on the waterfront), earthquakes (where safe builders subsidize the risky builders), or other disasters, governments always attempt to protect the vulnerable in the short-term and as a result, make everyone more vulnerable long-term.
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