Natural and Industrial Disasters: Land Use and Insurance

by Céline Grislain-Letrémy & Bertrand Villeneuve

Uncontrolled urbanization in exposed areas increases the cost of natural and industrial disas- ters. In the case of industrial risks, these land use externalities are directly exerted on the firm which is liable for the disaster. In the case of natural risks, the externalities take the form of free- riding on the mutualization mechanism. Land use policy and insurance can provide incentives to internalize these externalities. However these tools cannot be more precise than the hazard map on which they are based. We describe the efficiency gains of refining hazard categories, keeping in mind that they should be balanced with assessment costs. We determine the impact of climate change and demographic evolution on the equilibrium. Our results are established for a spectrum of alternative scenarios with various distributions of bargaining power between the households, the mayor and the firm.

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