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    Housing bubble & Flood Insurance Subsidy

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    (1) Due to the housing bubble, many houses are now selling for much less than their selling price just two or three years ago. There is evidence that homeowners with virtually identical houses tend to ask more if they paid more for the house. What fallacy are they making?

    (2) The U.S. government subsidizes flood insurance because those who want to buy it live in the flood plain and cannot get it at reasonable rates. What inefficiency does this create?

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    Step 1
    The fallacy they are making is that they feel that the selling price should be equal to the buying price. The sellers are not relating the selling price to the current demand and supply in the market. The sellers are not assessing the current value of their houses. Instead they are assuming that the values of their houses have remained the same even though there have ...

    Solution Summary

    This solution explains prices during housing bubble and subsidy on flood insurance. The sources used are also included in the solution.