January 7, 2009

From optimal to practical safety standards for dike-ring areas

After the flood disaster in 1953 in the southwestern part of the Netherlands, Van Dantzig tried to solve the economic decision problem concerning the optimal height of dikes.

His solution has a fixed probability of flooding after each investment (Econometrica, 1956). However, when there is economic growth, not the probability of flooding but the expected yearly loss by flooding is the key variable in the real optimal safety strategy. Under some conditions, it is optimal to keep this expected loss within a constant interval. Therefore, when the potential damage increases by economic growth, the flooding probability has to decline in the course of time in order to keep the expected loss between the fixed boundaries.

The purpose of the paper is to show the implications of the optimal solution in case there are differences between costs and benefits among dike-ring areas. Further, the paper focuses on the translation of the theoretical results into new legal standards that can work well in practice.



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