Can we avoid overdevelopment of river floodplains by economic policies?: A case study of the Ouse catchment (Yorkshire) in the UK

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River floodplains are significant environmental resources in that they provide multiple ecosystem services. However, river floodplains are/tend to be overdeveloped because indirect-use values linked with ecosystem services are overlooked by private landowners. In a case study of the Ouse catchment, it turns out that river floodplains tend to be overdeveloped in upstream areas because of a unidirectional spatial externality. We set a simple model that considers both direct- and indirect-use values to analyse the social optimisation. The essential point is that we must consider two types of environmental externalities related to the ecosystem services of river floodplains to make decisions on floodplain development. First, the development of river floodplains has opportunity costs in terms of lost ecosystem services. Second, the development of floodplains increases flood risks to people downstream (imposes a unidirectional spatial external costs). Theoretically, we can easily deal with the problem by zonal economic policies: zonal taxes or subsidies (price policies) and zonal marketable permits or transferable development rights (quantity policies). On the practical side, however, there are so many problems. Then, such approaches are too complex to use. First of all, we have to specify real complicated economic and physical systems which show non-linearity, irreversibility, site-specific relationships, and inter-dependency between systems and sites. Secondly such policies should be ‘zonal’, which might impose substantial transaction costs. In order to apply them to real situations, we have to determine the appropriate number of zones, their sizes and geographical shapes, and then set appropriate rates or amounts of permits in each zone. Furthermore, the determination of zones is difficult because of the trade-off between the internalisation of externalities and implementation costs of policies, which are also related to political frictions and market failure.