We know that standard home owner's insurance doesn't doesn't cover floods. The question is why not?

Because there are some perils that would cause such large scale devastation that it would wipe out any insurer who tried to insure that peril. Flood is one such example, other examples include war and earthquake. So insurers choose to exclude them on the standard policy. However even some of these perils insurers are still willing to insure for a high enough premium, with a high enough deductible in areas where the peril doesn't occur very often or for a peril that occurs infrequently. Earthquake is an example of this. You can still purchase Earthquake coverage in areas that are at risk for Earthquakes because major ones that cause significant damage occur infrequently (i.e. once in a decade). Keep in mind the additional premium to add this coverage in those areas can amount to several hundred dollars in additional premium per year and the deductible can be $5,000 or more. Flood is one of those perils that can occur almost anywhere under the right conditions, so you're theory that an additional one or two dollars per policy would cover flood costs is heavily flawed. Look at how much the FEMA program costs per year to deal with flood forecasting and damage repair.

I'm not familiar with the US market.

You shouldn't have to subsidize anyone by taking on higher premiums. If an insurers pricing model was 'perfect' then each person would pay an amount equal to the risk that they bring into the common pool (of funds). Hence those on a known flood plain will pay a higher rate based on their postcode.

But because an insurers pricing is never Truly perfect then I would guess that the problem here is that If one insurer accepts flood as a risk then this will attract all the 'bad' high frequency claim business. This does have the effect of pushing up every ones premiums and makes the insurer less competitive. Meaning that all the 'Good' business detracts and goes elsewhere. Leaving a book of only 'bad' clients.

So probably if you use a Nash equilibrium to work out the market outcome, everyone excludes flood cover. Unless (as is the case with the UK) the market can reach an agreement where all household cover sold will automatically cover flood unless explicitly excluded.

I say 'unless explicitly excluded' because its still the case that if when you complete a proposal for insurance and you state that your property has been flooded in the past then you will still likely be refused cover entirely or partially. It will be up to you to prove that there has been improvements in the area to protect against flooding.

For the same reason that they don't cover war, or nuclear radiation.

It's completely not marketing. It's that flood is such a WIDESPREAD, catastrophic loss, that engenders such extreme claims, you can't collect enough premiums on it, to cover the losses.

I'm not sure if you've looked at all, about how much damage floods actually do. Assuming 300,000,000 people in the USA, lets also break total damages down, BY PERSON (keeping in mind that kids live with parents, and couples live together, so the actual HOUSEHOLD number will be larger:

Hurricane Ike, 2008 29.6 billion in damages, cost per person, $99 per head

Hurricane Katrina, 2005 81 Billion in damage, cost per person, $270 per head

Hurricane Wilma, ALSO in 2005, 20.6 billion in damages, cost per person, $69

Hurricane Charlie, 2004, 17.6 billion in damages, cost per person $69

How thrilled will you be, in Ohio, getting that "bill" in 2005, for an extra $1,000 to pay for someone in New Orleans?

Look, in a GOOD year, flood damages in the USA, cost $15 a head - or $45 a household. In a bad year, like 2005? $1,017. Factor in the fact that people less prone to flood claims - most of them - don't WANT flood insurance, and the average cost for those who do, to BREAK EVEN, will skyrocket to five figures pretty quickly. If you DON'T live in a flood plain, your flood insurance cost is cheap - maybe $300 a year or so. Why don't you buy it? Because you don't think you're going to use it!!

People don't have to live in a flood plain, to be ABLE to buy flood insurance!! The federal goverment has CREATED the National Flood Insurance Plan, to ALLOW you the access to flood insurance!! Why do you want an INSURANCE company to do something for you, that YOU are perfectly capable of doing for yourself? That doesn't make sense.

Take responsibility for yourself. Go buy your own flood coverage, if you want it.

People who choose to live in a flood should assume higher cost for their insurance than people who choose not to. But in a way all of us in the U.S. who pay federal taxes provide some support for that through FEMA.

I live 2 blocks from a potential flood zone, but my home was built in 1910 and does not even have or need a sump pump. So why should I have to pay extra to support people who choose to live down by a scenic river or creek?

If the standard homeowners policy covered "all" perils it would be too expensive for the average consumer. Covering floods, earthquakes, hurricanes, molestation, theft of cash (and the list goes on) would make the average policy too expensive. You can buy all those "extra" coverages if you want. See the link below to read more about flood insurance.

It is not just a few dollars. I live in an area considered low risk but the premium would be over $1,000 for home and contents. It turns out about 20% of all claims are from low and moderate risk areas.

$1-$2 per person would not be nearly enough, unless you are talking about the price per hour or per minute. Here's what it would do. It would rise the price of insurance so much that many homeowners would not buy any insurance, so they would not be protected from floods, fire, or anything else.

And would you also subsidize earthquake insurance for those living in California? Would you subsidize Wind coverage for people in Florida also? How about Hail coverage for people that live in the Texas panhandle. How about you pick up the cost of auto insurance for the guy who has 5 DUIs? Why does everything in America have to be "socialized?"