3

AN EXPERIMENT IN PUBLIC CHOICE:

THE MIAMI CONSERVANCY DISTRICT, 1913q922

j. Fred Glertz

In March of 1913 the land along the Miami River in southwestern Ohio was devastated by the most serious flood in the recorded history of the area. Property damage was estimated to exceed $100 million with over 300 lives lost in the flood. While floods along the Miami River were not uncommon, the magnitude of this flood was such that the severe damage extended far beyond the normal flood plain into many areas of the valley that had come to be considered safe from flooding. In the weeks following the disaster, there was a great outcry from citizens of Dayton and Hamilton as well as smaller cities in the valley for action to prevent the recurrence of major floods in the future. The problem of providing flood protection for the Miami Valley was a classic example of a social choice situation involving public goods and externalities which could not be handled effectively either by private initiative or by the actions of the local governments in the area as they were constituted at that time.

The response to this situation was an extraordinarily sophisticated arrange- ment which showed a remarkable understanding of the complexities' involved in providing flood protection for this area. The resulting flood control program was widely heralded in engineering circles for the innovative technological features of the project design which included several major engineering developments. The technical success of the program, however, has tended to overshadow many of the economic and political institutional arrangements which from the perspective of 60 years seem equally creative. For example, there was early realization that the technological externalities of the situation made an area-wide approach superior from an engineering point of view, yet such a technique was impossible under the institutional arrangements existing at the time. This brought about a drive to

*Associate Professor of Economics, Miami University, Oxford, Ohio. I would like to thank George Daly and David Ferguson for their comments on an earlier draft of the paper,

64 PUBLIC CHOICE

change Ohio law to allow, the creation of special functional districts to deal with these types of problems.

In addition the planners of the project were required to carry out a quite comprehensive benefit-cost study to justify the program. The most interesting feature of this analysis was the attempt to go beyond just the estimation of gross benefits and costs into the area of distribution with a detailed breakdown of costs and benefits by property ownership in the valley. This served as the basis for an effort to implement a benefit system of taxation for a public goo d (which is frequently dismissed as being infeasible if not impossible by most economists) on a really massive scale. The resulting system of taxation and damage payments is a rather unique pragmatic attempt to implement a policy very similar to the compensation principle of welfare economics where the gainers from any change in policy are required to compensate those who lose.

The purpose of this paper is to recount the economic and political aspects of the provision of flood protection for the Miami Valley from the viewpoint and using the terminology of welfare economics. This study will illustrate the fact which is often overlooked by economists that quite reasonable, if not optimal, adjustments to the economic realities of public choice situations are often possible with a rather minimal formal understanding of the forces at work. The existence of potential gains from the provision of a public good presents a strong incentive for citizens and government officials to modify the existing institutional arrangements to make the exploitation of these gains possible. In many respects the engineers and lawyers who devised the plan almost 60 years ago appear to have been more adept at dealing with the economic and political complexities of this type of problem than have most of their successors during the intervening years.

L The Need for Collective Action 1

In the weeks following the flood of 1913, there seemed to be quite general agreement that something had to be done very soon to prevent the repetition of the damage. Private measures such as the floodproofing of buildings and the construction of protective levees for individual properties were obviously not likely to be effective for the majority of the valley against a flood of major proportions. Even where such measures were possible, they were very expensive as compared to more general strategies. Another possibility, that of reevaluating the land patters on the floor plain, seems not to have been seriously considered as an alternative. Since the flooded areas in cluded the heart of downtown dyton as welI as the business districts of most of the other cities along the river (the highest valued land in the valley), the emphasis from the very beginning was upon restoring the value of the land and not drastically changing land-use patterns.

Collective action at some level seemed to be a necessity for any effective program. The first efforts in this direction took the form of campaigns to solicit voluntary contributions to provide funds to be used for flood protection. Within two months after the flood, over $2 million had been collected in Dayton alone. While this was a substantial amount, it fell far short of the level of support needed to provide protection for even a small portion of the valley. In addition, effective private action would have been impossible without many of the powers vested solely in government such as that of eminent domain. In retrospect, voluntary collective action seemed destined to fail from the beginning because of the public good characteristics of flood protection. For this type of project, exclusion is not

1A more complete description of the details of the provision of flood protection in the Miami Valley can be found in the documents of the Miami Conservancy District listed in the references, especially Bock. Another account can be found in Morgan (1951).

EXPERIMENT 65

possible once flood control is provided for an area which means that the free-rider problem is likely to preclude any sort of non-governmental collective action. A portion of the funds originally collected for the construction of flood control facilities was used as part of a lobbying effort to persuade government to provide the protection while the remainder was eventually refunded to the donors.

Attention next focused on the cities as the political entities to provide flood protection. At this point (mid-t913), the general feeling seemed to be that the severity of the flood had been caused by constrictions in the river channel such as bridges which were too low or the growth of trees in the river bed. Prospective plans therefore centered on channel improvements such as widening and dredging operations, the straightening of sharp curves, and the building of levees. There was no reason to believe that these types of projects could not be carried out at the local level. Preliminary engineering studies, however, revealed that channel improvements necessary to handle a flood of the 1913 variety would require a massive expenditure for the city of Dayton and might in fact be impossiblefor the city of Hamilton which was further downstream where the volume of water was greater. Furthermore, channel improvements, in addition to being very- costly, often created negative externalities for downstream areas since they insured that none of the flood pressure could be released through the natural flooding of low-lying areas which meant that an added volume of water would be passed on to the areas below the improvements.

Interest then shifted to more inclusive plans as the result of a study conducted by Arthur E. Morgan, an engineer hired with the funds from the voluntary contributions in Dayton. Morgan's report suggested that flood control for the valley was basically a peak-load type problem. One option, the one first considered, was to build the capacity of the channel large enough to carry the peak flood level through the cities without damage. Since the peak water volume during the 1913 flood was approximately 3,000 times the volume of the river when low, this strategy as indicated earlier was extremely costly. Morgan's recommendation was to build a series of dams to spread the peak load over several days or weeks instead of over several hours. His preliminary estimates were that the strategy of detention reservoirs along with certain channel improvements could provide flood protection for most of the Miami Valley at less cost than that which would be required to protect just the city of Dayton by channel improvements alone.

While this strategy seemed to be the least cost solution to providing protection, the implementation of such a plan presented some serious problems. The plan if implemented would provide wide-ranging benefits along much of the river although many upstream areas on the Miami and some of its tributaries above the dams would be subjected to higher probabilities of flooding. This then presented a problem of potential income redistribution between the upper and lower sections of the valley which meant that voluntary cooperation (without compensation) was unlikely among the different parts of the valley.

In addition, no existing political jurisdiction or combination of jurisdictions had the necessary powers to carry out such a project at the local level because of a variety of restrictions placed upon cities and counties by the State of Ohio. The legislature of the State of Ohio also seemed unwilling to provide flood protection that would benefit fewer than 10 of the 88 counties (the art of logrolling apparently not having developed to its present level). An appeal to the Federal government was also considered, but rejected for basically two reasons. At this time, the Federal government was not as actively involved in providing flood protection as in later years, so any decision from the Federal level would have very likely been subject to long delays as well as great uncertainties as to whether the project would actually be carried out. In addition, the residents of the Miami Valley

66 PUBLIC CHOICE

feared that if the Federal ggvernment were to undertake the project, the interests of the Valley might be subordinated to the broader interests of providing flood protection for the Ohio and Mississippi Rivers. If this were the case, much larger reservoirs and much greater disruptions would have been likely with no increase, or perhaps a decrease, in the degree of local protection.

While the provision of flood protection by the state government seemed unlikely, permissive legislation by the state was necessary to allow the formation of a special governmental district that would encompass an area large enough to adequately deal with the problem. The passage of the Ohio Conservancy Act (OCA) in February of 1914 seemed to be a politically acceptable compromise by the state legislature which had been under intense pressure to act in the area of flood control. The Act which made possible the creation of special conservancy districts across county lines provided an institutional arrangement to deal with ptiblic goods with wide-ranging effects without directly involving the state in their provision. The Act set up procedures for establishing districts as well as rules of governance. The districts were given broad powers such as the right of eminent domain and the power to tax both individuals and governments within the district with few restrictions. Two of the most important qualifications of the Act were that for any plan to be approved, the benefits must exceed the costs, and that there must be an equitable distribution of the costs assessed according to the benefits received. There was no precise specification, however, of the way these costs and benefits were to be measured or of the instruments to be used in distributing the cost. In this and many other respects, individual districts were given considerable latitude in their operating procedures. The OCA in essence was a type of "fiscal constitution" for the conservancy districts in that it established a set of decision-making institutions as well as restricting the possible outcomes of the decision process by limiting the kind. of projects which could be undertaken and in a general way by limiting the method of financing these projects .2

On the day following the signature by the governor of the Ohio Conservancy Act, petitions were filed in Dayton to establish the Miami Conservancy District (MCD). The OCA provided for the establishment of a Conservancy Court to oversee the affairs of a conservancy district. Strangely enough, the Conservancy Court was composed of a Common Pleas judge from each country which had any area involved in the conservancy district (nine in the case of the MCD). For a district to actually being to function, the Conservancy Court had to approve a definite plan by a majority vote. The court in turn appointed a board of directors which employed administrative personnel such as a director and engineer. In the case of the MCD, the board of directors tended to be well known civic leaders, usually either businessmen or lawyers. The Conservancy Court had in a sense both executive and legislative powers and was composed of members of the judiciary. While the judges were elected, the actions of the MCD were somewhat insulated from public opinion. It should be noted, however, that on most controversial questions, the judges tended to reflect the sentiment of their counties-the judges from upper valley counties where much of the construction as well as increased flooding would take place being considerably more critical of the proposed plan than the lower valley judges.

While the use of special functional districts has sometimes been criticized for their lack of responsiveness, the formation of the MCD seems to have been a quite reasonable accommodation to the economic and political realities which faced the residents of the Miami Valley after the 1913 flood. 3 With the unwillingness of the

2For a discussion of the concept o-f a "fiscal constitution," see Buchanan (1967), pp. 117-121.

3For a discussion of the advantages and disadvantages of the use of special districts to deal with boundary problems arising in the provision of public goods, see Bish, pp. 55-57 and 67-68.

EXPERIMENT 67

state and Federal governments to provide flood protection and with the inability of local governments to do so, the formation of a political jurisdiction with the legal powers necessary to undertake such a project which encompassed the area likely to be either benefitted or damaged by the program seems very much in line with the policy advocated by many economists t oday - tha t jurisdiction size should be just large enough to internalize all the costs and benefits of a particular program. 4

II. The Miami Conservancy District and the Provision o f Flood Pro tection

A..77ae Project Plan and Philosophy. The formation of a special district was necessitated because the most feasible flood control plan pro~ided widespread benefits all along the downstream areas o f the river along with damages in the form of more likely flooding in some upstream areas as well as requiring substantial construction activities both upstream and downstream. The plan originally suggested by Arthur Morgan, who became chief engineer of the MCD, relied heavily on the use o f detention reservoirs along with channel improvements in the cities. This plan became the basis for the MCD flood control program. In brief, the plan called for the construction of five dry dams on the Miami and its tributaries that would spread the flood peak on the river over a longer period. 5 In addition, the cities were provided with additional protection by the widening and deepening of the channel, the raising of bridges and removal of bridge piers from the channel, the straightening of sharp turns and the installation o f revetments and concrete on the river bed to allow for an increased velocity o f flow without erosion.

This plan was estimated to provide protection for the cities along the river for a flood equal to 140 percent of the magnitude of the 1913 flood which was considered to be greater than a 100 year flood. Substantial protection was also afforded the rural agricultural areas along the river because of the detention strategy although this was by no means complete since channel improvements were not made outside o f cities. The reason for the choice of the 140 percent figure as the maximum level o f protection was not basically a marginal decision o f the increased benefits versus the increased cost of added protection. Instead, it was more in the nature of a political constraint faced by the planners in that less than "full" protection for the cities would have met with great disfavor. The problem faced by the planners was twofold: (1) to find the least cost method of providing this "full" protection and (2) to find if the benefits of such a plan outweighed the costs.

The use o f benefit-cost analysis was certainly not originated by the MCD, but their efforts were very likely the most comphensive and diligent application of this project evaluation tool to that date and for many years thereafter. In fact, the

4'Iqais situation is described as the condition of perfect correspondence by Oates, pp. 46-47. Tullock has argued that many interjurisdictional external effects can be effectively internalized by negotiation and bargaining among the affected governments. This approach however is not likely to be effective for situations such as the Miami Valley where the existence of a large number of governmental jurisdictions introduces problems of the free-rider effect among governments.

5In many flood control projects there often is controversy over when the flood gates should be closed on the reservoirs to protect downstream areas and when they should be opened to mitigate damage upstream. The design of the MCD incorporated an ingenious method of resolving this conflict automatically. The dams of MCD were equipped with no flood gates at all making the decision automatic. With only a fixed sized outlet, during flood periods the volume of water coming into the reservoir would exceed the capacity of the outlet and the reservoir would fill with a nearly constant volume being discharged continuously. When the flood period passed, the reservoirs would gradually drain so that much of the time a large part of the reservoirs were dry and available for farming or recreational activities.

68 PUBLIC CHOICE

requirement for a benefit-cost analysis of any proposed plan was an intergral part of the Ohio Conservation Act. Under this act, the Conservancy Court was required to disapprove any plan whose costs outweighed its benefits and to disband the conservation district in question. This went considerably beyond the requirements in effect at the federal level at that time of simply considering the question of benefits and costs for projects such as navigation improvement. 6 Arthur Morgan stated at a later point that while the law required only that the benefits exceed the cost, from a political point of view for the plan to be approved and for the conservancy bonds to sell, benefits had to exceed costs by a very large margin (possibly by a ratio of 3 to 1).7

While the use of the technique of benefit-cost analysis was certainly unusual for that time, the handling of the possible redistributional consequences of the program was even more remarkable. Most analyses of this sort are primarily interested in whether the benefits exceed the cost, i.e., if the project is apotential Pareto improvement. For example, the Flood Control Act of 1936 considers a project to be feasible if "the benefits, to whomsoever they may accrue, are in excess of the estimated costs. ';8 A project is normally considered desirable if those who gain could fully compensate those who are damaged, but without the stipulation that the compensation actually be paid. The equity requirement of the Ohio Conservation Act as interpretaed by the MCD, however, went beyond the idea of the hypothetical possibility of compensation in that payment from the gainers was actually made to those who were made worse off. For the plan to be approved, not only did the sum of the benefits to society have to exceed the costs, but in addition, each individual's benefit from increased flood protection plus compensa- tion payment was supposed to exceed the sum of any damage plus the required tax payment. To the extent that such a policy was feasible, the flood control program would not result just in a change that could potentially make everyone better off, but would actually be a movement to a Pareto superior position. 9 (The implementation of the plan will be discussed below,)

While a benefit system of taxation is feasible for goods where exclusion is possible, the implementation of such a broad based system of benefit taxation and compensation for a public good has been generally dismissed as impossible by economists. For example, Haveman states: 10

Not only is it impossible to imagine the compensation actually being made (which is, in fact not an absolute requirement) but also it is equally impossible to imagine the formation of a list of losers ad gainers together with their real gains and losses, which would be essential for such an evaluation.

It should be noted that James Buchanan has argued on the other side that the only way to actually prove that a project is really a Pareto superior move is for full corn ensatlon to b 11 p " e paid. I~ such compensation were actually paid, a vote to

6Haveman (1965), pp. 21 - 22. 7Morgan (1951), p. 320. 8This quotation.ls contained in Eckstein, p. 2. 9This policy has much in common with Wicksell's unanimity rule although a vote of the

affected parties was not actually required. The reasons why unanimity is not likely even when compensation is paid are discussed below.

10Havemen (1965), p. 130. 11Buchanan, (1959), p. 128.

EXPERIMENT 69

approve such a move (as opposed to no action) would pass unanimously if individuals did not behave strategically. This, however, does not mean as has sometimes been suggested that the program could be carried out without compulsion on the part o f the government. Since the program was expected to have a lararge surplus o f benefits over costs, strategic behavior relating to the distribution of this surplus would be extremely likely to occur if unanimity were required. 12 Individuals although made better off by a program would still find it in their self-interest to attempt to maximize the compensation paid by overstating damages and minimize tax assessments by understating benefits. Without the use of eminent domain and other compulsory measures, one person in a strategic position might find it possible to appropriate much of the surplus of the program to himself. Because o f this problem, it is necessary for the government to independently estimate each individual's benefit and/or damage from @ program.

Attempts to apply benefit taxation in such a way that the gainers from a public program compensate the losers are usually rejected on the grounds that such a policy would virtually paralyze government with the result that no program would be possible. While this is likely to be true for many situations, the case of the MCD indicates that such a policy was an important asset in gaining the political acceptance of the program. The fact that every conservancy district had to be self-financing was important in gaining the approval of the permissive legislation at the state level since it insured little redistribution within the state from areas outside a district. In addition, the system in so far as it was successfully implemented was an important factor in the acceptance of the MCD plan within the district where the potential for differential benefits and damages was very great. Without the payment o f compensation to the losers from the beneficiaries of the program, the problem of reconciling the conflicting interests o f the various geographical segments along the river could well have grown to unmanageable proportions. It is likely, therefore, that the taxation and compensation scheme was not just desirable from the standpoint of equity, but in fact was such a vital part of tile program that the provision o f flood protection on an area-wide basis would have been impossible without it at that time. It is interesting to note that Wicksell long ago recognized the political advantages of benefit taxation although his work was largely ignored by English speaking economists for many years. 13

B. The Measurement of the Benefits and Damages. Obviously the feasibility of a policy of benefit taxation and compensation is largely dependent on the ability of the government to arrive at generally acceptable estimates o f costs and benefits on an individual basis. The inability to measure these quantities is a major reason why such a policy is not used more widely. Because o f the importance of this question, the techniques used by the MCD to estimate the benefits and damages will be examined in some detail.

In measuring the benefits of the flood control program, the MCD implicitly assumed that changes in land values in the flood plain would capture the benefits of the program. There was virtually no discussion of the possibility o f estimating the stream of benefits over some planning horizon although this would have been possible from the data they collected concerning the probabilities of various rates

12For a more thorough discussion of this problem, see Buchanan (1967), pp. 116-117. 13In discussing this situation, Wicksell states: "Suppose, for example, that some new

state activity is not of damage to any social class nor even a matter of indifference, yet is overwhelmingly beneficial to one particular group, or at least is more highly valued by that" group than by others. With a given pre-determined distribution of taxes this new extension of public service might well faiI to receive a majority of votes in the legislative body representing the taxpayers, although with some different distribution of the necessary tax burden even unanimous agreement might have been possibIe." (p. 78)

70 PUBLIC CHOICE

of flow of the river. It has been shown that the changes in 1and values can in fact serve as an accurate measure of the effects of public programs if a set of restrictive assumptions are met. 14 While it is unlikely that all of these assumptions were actually met and thus that the estimated land value changes were perfect indicators, it is still likely that they served as good indicators since property owners are likely to be the primary beneficiaries of programs such as flood protection. In addition, property taxation was the most familiar and most readily available means of raising revenues at this time, so it was only natural that an at tempt was made to attach a specific level of benefit to each piece of property which could then be used as a basis for taxation.

Aside from the theoretical difficulties of basing benefits and damages on changes in property value, the estimation of these changes is certainly not without its problems in an ex ante evaluation such as this. The actual measurement involved the appraisal of over 77,000 separate pieces of property in the Miami Valley.15 The level of flooding during the 1.913 flood was recorded for each piece of property as well as the estimated level of flooding for a flood of the same magnitude after the control measures were in effect. It should be emphasized again that not all the land benefitted since the probability of flooding in many upstream areas above the reservoirs was increased. It is also interesting to note that benefits and damages were estimated simultaneously in a comparable fashion. These physical estimates of the level of flooding before and after protection were carried out with very little difficulty. The major problem arose, however, in attempting to use these data to estimate land value changes.

The major problem faced by the appraisers was to assess the value of property which was very much in a state of flux because of the effects of the flood and also because of the expectation on the part of many people that flood prevention was near at hand. They dealt with this problem by assuming that the basic goal of the MCD plan was to restore property values to their pre-1913 level. This implicitly assumed that the pre-flood values were not discounted in any way for the possibility of flooding. This seems reasonable for much of the land since the 1913 flood was of a much greater magnitude than any on record, but it was certainly not the case for some low-!yin_g land that had periodically been subjected to flooding. The benefit to a piece of property was defined in the following way: Benefit = Pre-flood value - Post-flood value - Physical damage to property by the flood which protection could not restore. This would have been an accurate indicator only if the pre-flood values were not discounted at all for flooding and the post-flood values protection could not restore. This would have been an accurate indicator only if the pre-flood values were not discounted at all for flooding and the post-flood values were arrived at with no expectation of flooc control measures becoming available. Since flood control was being discussed within a few days following the 1913 flood most of the post-flood market values were obviously not extremely useful.

In order to deal with this problem, a rule of thumb estimate of the depreciation in value due to the possibility of flooding was necessary. From other areas o f the country, estimates were gathered which indicated that flooding resulting in complete damage often brought about a 40 percent decrease in the value of undiscounted property. These estimates were reinforced by land market developments in Hamilton. On a per capita basis, Hamilton suffered the most severe damage in terms of both loss of life and property from the 1913 flood. Because of the extremely high cost of channel improvements to contain the high flow at this

14For a discussion of the use of changes in land values as a measure of the benefits from public programs, see Haveman (1972) or Lind. It should also be noted that the use of changes in land values implicitly deals with the problem of discounting future returns.

15For a more complete discussion of the appraisal procedure, see Engineering News-Record.

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downstream point, very little hope was held initially for effective f lood control measures. As a result of this, property in the year following the flood was selling for less that two-thirds of its pre-flood value. The choice was made therefore to estimate the benefit o f full f lood protect ion to a piece o f proper ty that was fully f looded (over 10 foot depth) in 1913 as 40 percent of the pre-flood value. 16 For property that was not fully flooded in 1913 or for property that did not receive complete protection, the benefit estimate was scaled downward.

Since all proper ty along the river did not sustain the same degree of flooding, it was necessary for the MCD to develop some method to determine the benefits received from flood protect ion based upon a site's original susceptibility to flooding. This led to the development of a measure called the flooding factor for a property which related the extent o f damage to a piece of proper ty for a flood of the 1913 variety to the depth of the f lood water in that year. This measure was used to estimate a site's need for f lood protection. The flooding factors are given in Table 1.

Table 1

DEPTH OF FLOOD WATER IN 1913 FLOODING FACTOR

1/2 foot 14% 1 foot 23% 2 feet 30% 3 feet 51% 4 feet 65% 5 to 6 feet 91% 7 feet 95% 8 to 9 feet 98% 10 or more feet 100%

While these flooding factors appear to provide reasonable estimates for damage caused by a flood of the magnitude of that of 1913,17 it is not clear that they provide a useful estimate of the susceptibility to floods of lesser severity. They were used, however, to arrive at a final figure for the benefit derived from the flood control project for each piece of property.

The method actually used in calculating benefits is given by the following formula: Benefit = (.4) x (Pre-1913 Appraised Value) x (Flooding Factor) x (Degree o f Protection). Therefore, the benefit assessed against proper ty which was flooded ten or more feet in 1913 and which was provided 100 percent protection

18 by the flood control project was 40 percent o f the pre-1913 value. The tax

16This clearly resulted in the understatement of the benefits that accrued to property which was normally very susceptible to even minor floods since the pre-flood value of this type of property was no doubt discounted for the effects of flooding.

17These flooding factors of the MCD compare fairly closely to the estimates of flood damage as a function of flood depth in White, pp. 61 - 63.

18For internal administrative reasons, the MCD later reduced their estimate of the effect of total flood damage from 40 percent of the preflood value to 30 percent. This was done to reduce the legal encumberances on property in the district. In commenting on the change, Morgan (1951) stated: "However, the 40 percent figure was then and still is considered a fair estimate of actual benefits." (p. 323)

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assessments to pay for the project were based upon this benefit figure. For property which received tess than full protection (almost all city property was rated as 100 percent protected, however) or which was flooded to a depth of less than 10 feet in 1913, the benefit figure was appropriately reduced, tn essence then, a property owner's tax liability was directly related to the depth of flooding on his property in 1913. While this method of estimating benefits is not without difficulties, it is certainly an interesting and creative way of dealing with the problem of evaluating the effects of a public program and of equal importance, it seemed to be accepted readily by the citizens affected as an equitable system.

According to the benefit formula, property owners who sustained no flooding in 1913 were not assessed any benefits. It was realized, however, that there were substantial benefits that accrued to persons not directly subjected to flooding. For example, flood control provided protection to parks, buildings, bridges, etc. owned by city and county governments. This protection obviously benefitted all the residents and taxpayers of these jurisdictions regardless of whether they were directly provided with flood protection. In addition, the MCD plan prevented disruptions in business and the necessity for relief efforts which resulted from floods. Again, these benefits were not limited solely to property owners along the river. In order to capture these external benefits, the MCD assessed benefits directly upon municipalities and counties in the valley. These benefits served as the basis for payments by these jurisdictions from their general tax revenues to the MCD. The county benefit estimates were based upon actual parcel by parcel measurements while the benefits to cities were arrived at by more flexible means. 19

As in most benefit-cost analyses, the estimation of the costs proved to be a less delicate problem than the measurement of the benefits. A certain amount of land was needed for the construction of the river bank improvements and the dry dams. This land was acquired by the use of eminent domain although there seemed to be an effort made, in fact, to slightly over-compensate the owners of this land to gain quick approval. This made up only a small portion of the land suffering potential damage from the project since large areas above the dams were susceptible to increased flooding. Owners of the land in this category were usually given three options. The first possibility was to sell the land outright to the MCD. This was often done for property with a greatly increased probability of flooding. Another option was the purchase of a flood easement by the MCD for the right to flood tile property when necessary. The last option involved the payment of damages for

ooding caused by the dams (largely to crops) on a year to year basis. The conservancy district would agree to this last option only on the condition that the property be utilized for only a limited number of specified purposes. In this case, building on the land was usually prohibited. In most cases the owners were given the option of choosing the method of damage compensation which they preferred in order to win as much voluntary cooperation as possible.

The benefits of the flood control program were originally estimated to exceed $ t00 million for the residents of the valley while the costs including land purchase, easements, other damage payments as well as construction costs were estimated at slightly less than $25 million giving a healthy 4 t o 1 ratio of benefits to costs. 20 This meant that beneficiaries of the project were required to pay one-fourth of

191n addition to taxing governments within the MCD, there were also no exemptions for prope~'ty owned by churches, hospitals, and other charitable institutions which are usuatly exempted from property taxation.

20The reduction in the benefit percentage as noted in footnote 18, meant that later the official estimate of benefits was reduced from the $100 million figure to $77 million. This obviously meant that the tax rates were increased from approximately one-fourth of the benefit figure to one-third for property owners.

EXPERIMENT 73

their assessed benefits as a tax payment to pay construction costs and compensa- tion. This could be paid either in a lump-sum or over a 30 year period at an interest rate of 5 percent. In so far as the assessed benefits were an accurate measure of the true benefits, the costs o f the project were distributed among individuals, firms, governments, etc. proportionally to their gain from the flood control program.

The estimation of the benefits and the damages of the MCD project was in all probability the most comprehensive effort to actually implement a benefit- compensation scheme for a public good. 21 Of the 77,000 pieces of property appraised (either benefits or damages), there were 1,900 exceptions voiced and 1,400 of these were settled by mutual agreement without appeal to the Conservancy Court. Of the 500 cases actually appealed, less than 20 were modified by the court. The number of appeals, however, is not necessarily an accurate measure of the fairness of the assessment procedure since individuals who were treated unfairly may have refrained from appealing because of the expense involved, or they may have felt there was little.chance of a better hearing at the appeals level. On the other hand, persons who had been assessed fairly could well have appealed to have their assessments lowered for strategic reasons hoping to take advantage of the district's desire for accommodation.

It seems clear, however, that from the point of view of public acceptance the evaluation procedure was highly successful. The large surplus of estimated benefits over cost provided a substantial cushion so that assessment errors could be made without actually making an individual worse off as a result of the program. For example, benefits for an individual parcel of land could have been substantially over-estimated (although as previously noted under-estimation seems more prob- able) without making the required tax payment greater than the real benefits since the tax rate was only approximately one-fourth the assessed benefits. This margin was also very likely the basis for the policy of overcompensation for damages as well. While the goal of distributing cost in exact proportion to the benefits received was certainly not attained because of the problems of estimation, it is likely that the taxation and compensation scheme at least came as close as possible in any real world, large numbers situation to assuring that the project was a Pareto superior change.

IlL Conclusion

In the years since the completion of the MCD project in 1922, there has been no serious flooding in the cities along the river. From an engineering and design point of view, the project has to be considered extremely successful. In fact, the plan of a unified river control introduced by the MCD served as a model for even more extensive projects such as the Tennessee Valley Authority. The economic and political institutional arrangements used by the MCD, viewed in retrospect, seem equally successful, yet they were not to gain favor with similar projects in the succeeding years. This was due in large part to the fact that most o f these projects were carried on at a higher level of government, usually the Federal level. I t is interesting to note that there has been renewed interest recently by economists in many of the same issues dealt with many years earlier in the MCD plans, e.g., the emphasis upon the desirability of the local provision of many public services that

21The actual implementation of the scheme most certainly increased the administrative cost of the MCD. For example, approximately 200 persons were employed for over a year in the appraisal work. These costs may be thought of as the price of distributional equity.

74 PUBLIC CHOICE

have previously been considered the sole province of higher levels of government. Likewise, there also seems to be considerable interest now in examining the possibility of a more widespread use of benefit taxation schemes along with compensation programs to alleviate some of the distributional problems associated with many public goods. 22 Just as in the case of the MCD, it is being realized that the use of tax-compensation programs can often prove politically advantageous in gaining acceptance for public programs.

The development of the MCD also illustrates the idea that governments like individuals can often make very reasonable adjustments to difficult economic situations without a full intellectual understanding of all of the complexities. It seems clear that the provision of this type of public good presented important opportunities for gains from trade which, however, were not exploitable under the existing institutional arrangements. The existence of such potential gains provided the incentive which resulted in behavior designed to change these existing arrangements in order to take advantage of the gains. 23 The individuals who planned the MCD were all non-economis{s who certainly had never heard of public goods, externalities, and the compensation principle and were probably only vaguely familiar with concepts such as benefit taxation, yet they were able to deal with this complex public choice situation in a very efficient manner which seems as innovative today as it did sixty years ago.

REFERENCES

Allan, Charles M. The Theory of Taxation. Hammondsworth: Penguin Books, 1971. Bish, Robert L. The Public Economy of Metropolitan Areas. Chicago: Markham,

1971. Boek, C. A. History of the Miami Flood Control Project. Dayton: State of Ohio,

Miami Conservancy District, 1918. Buchanan, James M. "Positive Economics, Welfare Economics, and Political

Economy."Jour. Law Econ., 2 (Oct. 1959), 124-138. • Public Finance in Democratic Process. Chapel Hill: University of

North Carolina Press, 1967. The Demand and Supply of Public Goods. Chicago: Rand McNally,

1968." Eckstein, Otto. Water-Resource Development• Cambridge: Harvard University Press,

1958. Haveman, Robert H. Water Reso/urce Investment and the Public Interest. Nash-

ville: Vanderbilt University Press, 1965. • The Economic Performance of Public Investments. Baltimore: John

Hopkins Press, 1972. Lind, Robert C. "Flood Control Alternatives and the Economics of Flood

Protection." Water Resources Research, 3 (1967), 345-57. Morgan, Arthur E. The Miami Conservancy District. New York: McGraw-Hill, 1951.

.The Miami Valley and the 1913 Flood. Dayton: State of Ohio, Miami Conservancy District, 1917.

Oates, Wallace E. Fiscal Federalism. New York: Harcourt Brace Jovanovich, 1972. Tullock, Gordon. "Federalism: Problems of Scale." Public Choice, 6 (Spring 1969),

19-29.

22For a summary of the recent interest shown in benefit taxation in the United States and England, see Allan, pp. 108 - 113. It should be noted, however, that most of the proposals advocating the use of benefit taxation concern goods where exclusion is possible.

23See Buchanan (1968), pp. 197 - 199.

EXPE RIMENT 75

White, Gilbert F. Choice of Adjustment to Floods. Chicago: University of Chicago, Department of Geography, 1964.

Wicksell, Knut. "A New Principle of Just Taxation." Classics in the Theory of Public Finance. Edited by R. A. Musgrave and A. T. Peacock. London: Macmillan, 1958.

"Appraisal of Flood Protection Benefits and Damages in the Miami Valley." EngineeringNews-Record, 89 (Nov. 16, 1922), 831-35.

Official Plan for the Frotection of the District from Flood Damage, Vol. 1. Dayton: State of Ohio, Miami Conservancy District, 1916.