On the use of tradable development rights for reducing flood risk

We explore the use of a system of tradable development rights (TDRs) as a method for reducing flood risks brought about by development in flood prone areas. Typical land management practice focuses on zoning policies which are able to increase economic efficiency, but result in an inequitable distribution of benefits. A TDR program has the potential to increase equity while maintaining the efficiency of the socially optimal land allocation. We begin with a graphical analysis and then present a theoretical model incorporating unidirectional spatial externalities, and demonstrate how a TDR program could be implemented to internalize these negative external costs.

► Development in upstream floodplains imposes external costs on downstream zones.
► Zoning policies can increase efficiency but result in inequitable benefits.
► We develop a land-use model accounting for unidirectional spatial externalities.
► A program of tradable development rights can optimize land management.