Writing in our (mine, Aaron Edlin's, and Joe Stiglitz's) The Economists' Voice http://www.bepress.com/ev/vol2/iss4/art4/, the extremely wise Ed Glaeser worries about whether rebuilding all of New Orleans makes sense. It may well cost hundreds of thousands of per New Orleans family to rebuild and protect from future hurricanes. Wouldn't it be better to rebuild fewer sub-sea level houses and build more above sea-level houses along, say, the road between New Orleans and Baton Rouge? Or to simply give people the money and let them choose whether to spend it rebuilding in New Orleans or keeping it as a nest egg and moving to Phoenix, San Jose, or Anchorage?
There are a bunch of non-convexities here: the cost of protecting future New Orleans from future hurricanes is not proportional to how many people live in the city itself. And there are very good reasons to have a City of New Orleans: the entertainment and historic district of the French Quarter, the great transshipment between river barges and ocean-going container ships, and the administration of the Gulf oil and gas industry. But are there good reasons to have a lot of people living below water level in the shadow of Lake Pontchartrain?