Relying on the HILDA survey, which contains information on respondents’ global evaluation of their present life, we apply a fixed-effects model to estimate the impacts of experiencing house damage from natural disasters on individual life satisfaction. In identifying the coefficient estimates from the regression that link life satisfaction, income and natural disaster experience, we calculate the compensating variation for experiencing a natural disaster in Australia.
In our analysis, we have found that experiencing damage from natural disasters reduces a person’s life satisfaction score by 0.094 points (on the 10-point scale). We have also considered gender differences. The life satisfaction score of women who have experienced damage from a natural disaster is 0.113 points lower than that of other women. The negative impact for men is not statistically significant. We have further investigated the differentiated effect of disaster experience for homeowners and non-homeowners. We have found that the negative impact of damage from natural disasters on non-homeowners’ life satisfaction score (-0.210 points) is more than twice as much as the impact on homeowners (-0.091 points). Our findings add evidence in support of targeted disaster recovery efforts for different cohorts.
We use the estimated coefficients and annual household income to calculate the implicit WTP for a reduction in risk of natural hazards. If the likelihood of damage from natural disasters reduces by 1.5 per cent, the average WTP for the prevention is $2,437. However, if damage from an otherwise certain natural disasters can be completely avoided, the estimated WTP is $162,492. These estimates provide no guidance on how to compensate for the effects of a natural disaster. In practice, compensation would take many forms and would be largely comprised of private insurance payouts.
Ultimately, our life satisfaction approach presents a supplementary tool for valuing non-market goods. This is particularly relevant when inadequate information or market restrictions prevent the disclosure of a public good’s true value. By contributing to the development of more holistic cost estimation methods, we hope to ultimately assist policymakers in designing disaster support measures to respond to the increasing prevalence of extreme weather events.
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