Valuing the Welfare Cost of Forest Fires: a Life Satisfaction Approach

Summary Sustainable natural resource management is at the core of the policy agenda, given the wide array of goods and services environmental resources generate, that significantly contribute to social welfare and productive capacity of modern economies. Likewise, there is a large policy interest in the monetization of the economic effects of environmental damages, to enable the design of response and mitigation strategies. This paper focuses on the valuation of the welfare losses from forest fires in the fire prone Mediterranean region applying the life‐satisfaction approach. Detrimental effects on utility relate to morbidity, losses of marketed goods and impacts on forest goods and services. For our empirical investigation, we employ self‐reported life satisfaction, income and other socio‐economic information from the Eurobarometer Survey Series matched with data on the number and extent of forest fires at the regional level. To account for endogeneity, we instrument forest fire characteristics with the mean daily precipitation in the region during the fire season ( A pril to S eptember). Our sample covers P ortugal, S pain, I taly and the M editerranean provinces of F rance, and spans from 1986–1993 and 2001–2003. We find that both forest fire incidence and forest fire extent have a significant negative effect on individual welfare. We estimate the monetary loss from an additional fire incident to be €0.20 and the loss from burning an additional 100ha of forest at €2.03 per household respectively. Nevertheless, the negative effect of forest fires on life satisfaction is significant only for the rural population. Results therefore provide useful insights on the detrimental effects of forest fires at the regional level for different segments of the population that should be accounted for in policy formulation.