The Background
• Imagine a market for residential properties in a
floodplain
• For simplicity, assume the properties are
identical with a price P1
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Consumer Surplus
(a) Consumer Surplus at Price P
Price
A
1.The total value (i.e., willingness to pay) of Q1 properties
to society is the area A0Q1C
2.Consumers pay 0BCQ1 for Q1 properties.
3.Consumer surplus is value received that consumers
did not have to pay for.
Consumer
surplus
P1
B
C
Demand
0
Q1
Quantity
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Flood Protection
• Flood protection reduces flood damages
• This lowers the price of living in the flood plain
• A price change increases consumer surplus—
the value received in addition to the price paid
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How Flood Damage Reduction Affects Consumer Surplus
(b) Consumer Surplus at Price P
Price
A
Flood damage reduction benefits are measured
as the area BCFD
Initial
consumer
surplus
P1
P2
0
C
B
Consumer surplus
to consumers of
new residential
properties
F
D
E
Additional consumer
surplus to initial
consumers
Q1
Demand
Q2
Quantity
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