Optimal investment in urban drainage: a framework for cost‐benefit analysis

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This article addresses some basic issues (including distributional weights, discount rates, and the value of life) in the cost‐benefit analysis of urban drainage and provides a framework for the estimation of the optimal amount of investment for flood mitigation. This involves: (i) estimating the expected total damage from flooding in present‐value terms before flood mitigation; (ii) deriving the reduction in expected total damage as the average recurrent interval of flooding increases; (iii) estimating how this interval increases with the amount of investment in flood mitigation; and (iv) choosing the optimal investment by equating marginal benefit and marginal cost. The framework is also applicable to other accident or damage mitigation investments and some issues discussed are relevant to all types of cost‐benefit analysis.

Original languageEnglish
Pages (from-to)19-28
Number of pages10
JournalThe Australian Economic Review
Issue number3
Publication statusPublished - Jul 1992

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