The Case For, or Against, New Orleans
Sometimes one’s choices may involve catastrophic decisions and bear great risk and yet there can be no clear answer. For example, if a person gets a divorce, shutters
a plant, sells a losing investment, or closes their business, will he or she be better off? The following case incorporates nearly all of the material you have covered
this far and presents an example of one such choice where nearly all of the alternatives have a significant downside risk.
Review the following information from the article “A Cost-Benefit Analysis of the New Orleans Flood Protection System” by Stéphane Hallegatte (2005):
Hallegatte, an environmentalist, assigns a probability (p) of a Katrina-like hurricane of 1/130 in his cost-benefit analysis for flood protection. However, the levees
that protect New Orleans also put other regions at greater risk. You may assume the frequency of other floods is greater than Katrina-like events (Vastag & Rein,
The new levees that were built in response to Katrina cost approximately fourteen billion dollars (in 2010). This is in addition to the direct costs of Katrina
(eighty-one billion dollars in 2005).
50 percent of New Orleans is at or below sea level.
A 100-year event means that there is a 63 percent chance that such an event will occur within a 100-year period.
The following are the interested (anchored and/or biased) constituencies:
Residents of New Orleans—both those that can move and those who cannot move
Residents of the surrounding floodplains at risk from New Orleans levees
The Mayor of New Orleans
The federal government—specifically taxpayers and the Federal Emergency Management Agency (FEMA)
Assume that the availability heuristics make people more risk averse (populations drop, at least in the short term). Consider how this would affect the local economy.
You are an analyst at FEMA and are in charge of developing a recommendation for both the state and the local governments on whether or not to redevelop New Orleans.
Write a report with your recommendation. Address the following in your report:
Analyze the economics of New Orleans in light of the above parameters and develop your own Cost-Benefit Analysis (CBA) for rebuilding.
Evaluate the value of the CBA for each constituency and integrate these estimates into a scenario model and/or decision tree. Analyze the results.
Clearly each of these constituencies may both overlap and be prey to a variety of group dynamics internally. For one of these options, discuss the decision pitfalls to
which they may be susceptible and make a recommendation on how to alleviate these pressures.
Starting with your CBA, estimate the relevant expected utility for the interested constituencies.
Note: You need not have absolute amounts but your relevant utilities should be proportional to one another.
Hint: If you assume that your total CBA for New Orleans is fixed for each constituency (do not forget the overlaps), then each constituency will have a piece of the
Make a case for or against rebuilding the city of New Orleans. This should be an executive summary; be concise and brief. Include exhibits.
Whether you are for or against, discuss how social heuristics could be used to your advantage, both ethically and unethically, in making your case. You may choose to
fill the role of one of the constituents, if you prefer.
Hallegatte, S. (2006). A cost-benefit analysis of the New Orleans flood protection system. Center for Environmental Sciences and Policy. Stanford University. Retrieved
Vastag, B., & Rein, L. (2011, May 11). In Louisiana, a choice between two floods. The Washington Post. Retrieved from
Assignment 1 Grading Criteria
Analyze the economics of New Orleans in light of the given parameters and develop a Cost- Benefit Analysis (CBA) for rebuilding.
Evaluate the value of that CBA for each constituency and integrate these estimates into a scenario model and/or decision tree. Analyze the results.
Discuss the decision pitfalls to which constituencies may be susceptible and make a recommendation on how to alleviate those pressures.
Starting with the CBA, estimate the relevant expected utility for these parties.
Make a case for or against rebuilding the city of New Orleans. This should be an executive summary—be concise and brief. Include exhibits.
Discuss how social heuristics could be used to an advantage, both ethically and unethically, in making a case.
Estimate what percentage of the class was for, versus against, rebuilding and provide a confidence interval for the estimate.
Ensure academic writing, such as grammar, spelling, and attribution of sources, is appropriate.
A Cost-Benet Analysis of the New Orleans Flood
To cite this version:
Stephane Hallegatte. A Cost-Benet Analysis of the New Orleans Flood Protection System.
AEI-Brookings Joint Center. Regulatory Analysis, 2006, pp.06-02.
HAL Id: hal-00164628
Submitted on 22 Jul 2007
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A Cost-Benefit Analysis of the Ne
w Orleans Flood Protection System
Center for Environmental Sciences
and Policy, Stanford University,
Centre International de Recherche sur l’Enviro
nnement et le Développeme
nt, Ecole Nationale des
In the early stages of rebuilding New Or
leans, a decision has to be made on the
level of flood protection th
e city should implement. Such decisions are usually
based on cost-benefit analyses. But in such
an analysis, the results are contingent on
a number of underlying assumptions and va
rying these assumptions can lead to
different recommendations. I
ndeed, though a standard first-
order analysis rules out
category 5 hurricane protec
tion, taking into account c
limate change and other
human-related disruptions of environmen
t, second-order impacts of large-scale
disasters, possible changes in the di
scount rate, risk aversion and damage
heterogeneity may make such a hurricane pr
otection a rational i
nvestment, even if
countervailing risks and moral hazard issu
es are included in the analysis. These
results stress the high sensitivity of th
e CBA recommendation to several uncertain
assumptions, highlight the importance
of second-order costs and damage
heterogeneity in welfare losses, and show
how climate change creates an additional
layer of uncertainty in infrastructure desi
gn that increases the probability of either
under-adaptation (and increased risk)
or over-adaptation (and sunk costs).
Six months after the deadly landf
all of the category 4 Hurricane Ka
trina on New Orleans, there is
an active debate about the rec
onstruction of New Orleans and th
e design of its future flood
protection system (
, Schwartz, 2005; Bohannon and Enserink, 2005). Although the
reconstruction of New Orleans ha
s been questioned by House Speaker
Dennis Hastert and is still a
debated question (Hahn, 2005), this paper will assu
me that it will be eventually carried out and
focus on an adjacent question, namely the necessity
of making the city flood protection system able
to cope with category 5 hurricanes.
corresponding author (hallegatte@centre-
cired.fr). I am grateful to Philippe Ambrosi, Hans-Martin Füssel, François
Gusdorf, Minh Ha-Duong, Robert Hahn, Mike Jackson, Mike Mastrandrea and Jonathan Wiener for very useful
suggestions and advices on the form and content of this
article. This research was supported by the European
Commission’s Project No. 12975 (NEST) “Extreme events: Causes and consequences (E2-C2)”.
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