Victoria’s Economic Bulletin: Valuing the costs of natural disasters using the life satisfaction approach

Hui Shi¹ and Edward Jin^2,3

¹ _{Financial Frameworks Team, Budget Strategy Group, Budget and Finance Division}^.
2 _{Revenue Forecasting Team, Economic Division}
³ _{Author contact details: veb@dtf.vic.gov.au}

_{Acknowledgements: The authors would like to thank Andrew O’Keefe, Rebecca Valenzuela, Helen Ratcliffe and Teresa Stewart for providing detailed feedback on this paper.
Disclaimer: The views expressed in this paper are those of the authors and do not necessarily reflect the views of DTF.
Suggested Citation: Hui Shi and Edward Jin (2022) Valuing the costs of natural disasters using the life satisfaction approach. Victoria’s Economic Bulletin, December, vol 6, no 4. DTF.}

Abstract

This paper applies the life satisfaction approach to estimate the cost of natural disasters in utility loss terms in Australia. In valuing the cost of natural disasters, the life satisfaction approach is shown to be a useful supplement to conventional approaches, which are largely unable to capture unobservable costs relating to people’s health and wellbeing.

Using a fixed-effects model with HILDA survey panel data conducted between 2009 and 2019, we find that experiencing damage from natural disasters has a negative impact on people’s life satisfaction and that the impact differs between men and women and between homeowners and non-homeowners. Using our estimates, we calculate that the detrimental effect of a natural disaster damaging an individual’s house is equivalent to a loss of $162,492 in household income.

The estimate provides no guidance on methods of compensation. In practice, compensation will take many forms and will largely be comprised of private insurance payouts. Our work contributes to the development of more holistic cost estimation for extreme weather events. Further research is warranted to establish reliable estimates of costs of natural disasters for application in other contexts.