Urban flooding and water quality problems are due to both natural phenomena and externalities related to urbanization. Development of upstream land increases the rate and amount of stormwater runoff from these areas. The consequences of increased upstream runoff are borne by downstream residents in the form of increased flooding and water pollution.
Mitigation efforts should include upstream externality controls, e.g., runoff detention basins, as well as more traditional flood control measures aimed at protecting residents at the site of damage. A static constrained maximization model is developed to determine efficient trade-offs among cost of abatement by "polluters," cost of preventive measures taken by victims, and damages to victims from untreated externalities. It is shown that abatement generates a public good while prevention generally produces benefits only for the victim undertaking the action. The consequence of this fundamental difference between abatement and prevention for efficient externality policy is explored. Who should pay for abatement and prevention is discussed in terms of efficiency and equity.
Because flooding in urbanizing areas is inherently a growing and irreversible externality problem, a dynamic analytical framework is also developed. Long-lived capital, e.g., buildings and streets, severely limit a completed development's ability to alter its runoff flows. The irreversibility of development makes stormwater externalities similar in nature to accumulating pollutants, e.g., mercury. Current emissions of these pollutants are controllable; the stocks accumulated from past emissions are not. Likewise, the flows of runoff from completed developments are (economically) unmodifiable. Only externality additions to existing runoff flows that will be generated by subdivisions yet to be constructed are controllable. Optimal and second best policies for controlling stormwater externalities, stock pollutants, and conventional pollutants are compared to highlight differences and similarities among these externalities.
It is shown that for a runoff control policy to be efficient: (1) because of irreversibility, runoff controls should be installed during a subdivision's construction. (2) The degree of a subdivision's detention of runoff should be based on the present value of damages that its runoff, in conjunction with other developments' runoff, will generate in the present and future. (3) The level of detention should reflect the location and timing of a development.
Although runoff flows are irreversible, channelization can expand a stream's carrying capacity and reduce flooding without affecting runoff flows. However, because of economies to scale and the irreversible capital used in channelization, stream channels can not continually be enlarged to control ever increasing runoff flows. The problems of the timing and sizing of irreversible upstream and downstream controls are explored in depth. It is shown that (1) it is likely to be cost-effective to expand channel capacity to control some but not all future increases in runoff, (2) some detention is likely to be efficient even in periods of excess channel capacity if in future periods runoff flows will increase to such an extent that irreversible "congestion" of the channel will occur, and (3) the probabilistic nature of rainfall and hence, runoff has significant policy implications.
An important policy guideline is that watershed-wide stormwater management is necessary since uncoordinated community by community action cannot simultaneously implement runoff controls upstream and flood controls downstream. The Federal Flood Insurance program, other federal flood control policies, and stormwater management in Houston, Texas are analyzed.