Sinkholes and Insurance

January 18, 2010

As a brief addendum to my previous post on the sinkhole problem in Plant City, Florida, I find it important to add one more note. Since posting the column, some have suggested that those property owners with property insurance would fare well under the circumstances. However, it’s important to point out that no matter who actually pays for the repairs, the money has to come from somewhere.

Insurance is a risk pool. When the risk is higher, the cost for the insurance is higher. Having multiple sinkholes in an area represents an increased risk. If the sinkhole repairs are paid by insurance companies, those companies would have to make up for that loss by possibly raising insurance premiums for areas at risk for these sinkholes.

In the end, there is no getting around the negative economic costs of the sinkholes. There is no free lunch.


Sinkholes and Optimism

January 16, 2010

Plant City, Florida and surrounding areas are sinking. Following the marathon of water-pumping in area fields, roads are being closed and property damaged. A rare cold snap combined with the need to protect the “Winter Strawberry Capital of the World” from a season of damaged crops is to blame.

Some are pointing fingers at the farmers, others are not. Regardless of who’s to blame, the fact remains that the sinkholes developing across the area are a threat to people and their property. The cold weather is also a threat to the livelihoods of the area’s many growers. Good news is hard to come by right now.

photo: Chip Litherland for The New York TimesAmid this dilemma, however, some people – ever the optimists – have suggested that the proliferation of sinkholes will actually help the local economy. The same argument is often made when hurricanes ravage an area. In the recent sinkhole example, the argument goes something like this: The sinkholes will need to be filled and property will need to be repaired; the individuals and companies repairing the damage will benefit and then spend their earnings on other economic goods and services, thus creating a cycle of beneficial economic activity.

Economists, however, have referred to this reasoning as the “broken window fallacy.” In this example, the optimist may argue that there is a chain-reaction of beneficial economic activity that proceeds a vandal breaking a car window. The car owner will pay someone to repair the window. The window repairer will use some of that money to buy new shoes for his kids. The shoemaker will use the money from the window repairer to buy his wife a watch. The watchmaker will then spend the money from the shoemaker on something else … and on and on.

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