Working Paper BETA #2006-29

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Title : Prevention and Compensation of Muddy Flows: Some Economic Insights

Author(s) : Sandrine Spaeter, François Cochard, Anne Rozan

Abstract : Recent surveys report the increasing number of muddy flows in many areas, and point out the fact that agricultural practices (among others) influence significantly the risk and severity of muddy flows. In this paper, we investigate the economic incentives that can be given to the farmer to adopt different practices. We propose an original economic instrument that entails an `ambient tax', voluntary revelations and a compensation fund. Because of the authorities' difficulties to be informed of each farmer's individual efforts, the tax cannot depend on the individual but on the collective level of efforts. However, each agent may lower his tax payment by revealing his individual efforts to the regulator so that high efforts may be rewarded compared to low ones. The tax revenue is used to supply a fund that is dedicated to the compensation of victims if a muddy flow occurs. hence it is possible to simultaneously increase the incentives for farmers to adopt more environmentally friendly practices and to improve the compensation of victims without mitigating their incentives to protect themselves against the risk of muddy flow.

Key-words : muddy flow, natural disasters, economic incentives, ambient tax, insurance, compensation fund.

JEL Classification : G22, H21, H23, H3, Q2, Q54