By Prof. John P. Brown (auth.)
There is through now a wide literature at the monetary facets of flood regulate and flood reduction regulations. The contribution of this paper lies in its cautious scrutiny of 1 unmarried serious element of the economics of floods, the alternative of land use by means of a unmarried land proprietor. We research that selection utilizing the equipment of dynamic programming, and specifically, we exhibit how that selection relies at the likelihood of floods for his piece of land. the speculation now we have built right here has been built within the context of floods. actually, this paintings grew out of an empirical research of flood simple damages, after we chanced on that the underlying idea was once now not but developed.! in reality, we suppose that the speculation is of even more normal curiosity. it's a concept of optimum funding selection less than uncertainty while that uncertainty is due to the destruction or failure of the funding at a random date. this is often the case in flood plains, however it can be definitely the right easy thought for realizing funding judgements within the face of earthquakes, fires, warfare harm, avalanches, and other forms of mess ups. those are just the extra dramatic examples of occasions the place substitute is needed at an doubtful date.
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Extra info for The Economic Effects of Floods: Investigations of a Stochastic Model of Rational Investment Behavior in the Face of Floods
Dt .... O optimality becomes (4) Vet) = max As dt payment of - a, approaches zero, the principle of [V(t), VIOl]. Thus as long as Vet) > V(O), the landowner will do nothing. As soon as Vet) declines to VIOl, that is, vet) = V(O), he will choose to replace. The value taken by the optimal replacement interval. t when Vet) = VIOl will be In keeping with our earlier notation, we shall call the optimal replacement interval mi for activity i (i = 1, 2, ... , n). Assume that the bes~ alternative is to do nothing; so the first alternative is the maximizing one.
I ~ This gives us a lower bound to the optimal policy. The difference between the two sides of (17) is the expected return due to future learning. 6 See Bhattacharjee (1968). - 40 - v ----- V()1) V 3 t}l) -)1 )1break even Figure 3 Figure 4 )1 - 41 - It is also shown there that an upper bound to vtr,t) is 00 (18) I ~(p) y(plr,t) dp. o To interpret this, consider Figures 3 and 4. Expression (18) is the value of the optimal program ~(p) for known p, weighted by beliefs about p. In other words, this is the expected return to finding out the true ~ immediately.
I We have shown how to calculate the damage from a single flood at a particular time when the economic activity is completely described and the physical effects of the flood are known. But why is it important to know the damage caused by a flood? Optimal investment decisions in the flood plain are calculated as in Chapters 3 and 4 without refe-rence to damage. Furthermore, as we shall show below, to know the benefits of flood control measures does not require a knowledge of expected damages before or after the flood control measure goes into effect.
The Economic Effects of Floods: Investigations of a Stochastic Model of Rational Investment Behavior in the Face of Floods by Prof. John P. Brown (auth.)