Value of life

The value of life is an economic value used to quantify the benefit of avoiding a fatality.[1] It is also referred to as the cost of life, value of preventing a fatality (VPF) and implied cost of averting a fatality (ICAF). In social and political sciences, it is the marginal cost of death prevention in a certain class of circumstances. In many studies the value also includes the quality of life, the expected life time remaining, as well as the earning potential of a given person especially for an after the fact payment in lawsuits for wrongful death.

As such, it is a statistical term, the cost of reducing the average number of deaths by one. It is an important issue in a wide range of disciplines including economics, health care, adoption, political economy, insurance, worker safety, environmental impact assessment, and globalization.

In industrial nations, the justice system considers a human life "priceless", thus illegalizing any form of slavery; i.e., humans cannot be bought at any price. However, with a limited supply of resources or infrastructural capital (e.g. ambulances), or skill at hand, it is impossible to save every life, so some trade-off must be made. Also, this argumentation neglects the statistical context of the term. It is not commonly attached to lives of individuals or used to compare the value of one person's life relative to another person's. It is mainly used in circumstances of saving lives as opposed to taking lives or "producing" lives.

Treatment in economics

There is no standard concept for the value of a specific human life in economics. However, when looking at risk/reward trade-offs that people make with regard to their health, economists often consider the value of a statistical life (VSL). The EPA does not place a dollar value on individual lives. Rather, when conducting a cost-benefit analysis of new environmental policies, the Agency uses estimates of how much people are willing to pay for small reductions in their risks of dying from adverse health conditions that may be caused by environmental pollution.These estimates of willingness to pay for small reductions in mortality risks are often referred to as the value of a statistical life (VSL).[2] The VSL is the value that an individual places on a marginal change in their likelihood of death. Note that the VSL is very different from the value of an actual life. It is the value placed on changes in the likelihood of death, not the price someone would pay to avoid certain death. This is best explained by way of an example. From the EPA's website:

Suppose each person in a sample of 100,000 people were asked how much he or she would be willing to pay for a reduction in their individual risk of dying of 1 in 100,000, or 0.001%, over the next year. Since this reduction in risk would mean that we would expect one fewer death among the sample of 100,000 people over the next year on average, this is sometimes described as "one statistical life saved.” Now suppose that the average response to this hypothetical question was $100. Then the total dollar amount that the group would be willing to pay to save one statistical life in a year would be $100 per person × 100,000 people, or $10 million. This is what is meant by the "value of a statistical life.” [2]

Economists often estimate the VSL by looking at the risks that people are voluntarily willing to take and how much they must be paid for taking them.[3] These types of studies, which look at a person's actual choices, are known as revealed preference studies. A common source of such choices is the labor market, where jobs with greater risk of death are seen to correlate with higher wages. , but has shown to be non linear.

Much of this research uses a wage hedonic approach, which looks at how wages change with changes in job characteristics. Basically, these studies regress wages on job characteristics like risk of death, occupation, industry, risk of injury, location, etc. By controlling for as many job characteristics as possible, researchers hope to tease out the portion of the wage that is compensating for the risk of death on the job. A recent summary of this literature is the 2003 paper by Viscusi and Aldy.[4]

Another method economists can use to estimate the VSL is by simply asking people ( perhaps through questionnaires) how much they would be willing to pay for a reduction in the likelihood of dying, perhaps by purchasing safety improvements. These types of studies are referred to as stated preference studies. A well known problem with this method is the so-called "hypothetical bias", whereby people tend to overstate their valuation of goods and services.[5]

Policy applications of the VSL

VSL estimates from wage hedonics are what the EPA uses when evaluating health benefits from programs. From the EPA's:

Beginning in 2004 EPA's Office of Air and Radiation (OAR) used an estimate of $5.5 million (1999 dollars; $6.6 million in 2006 dollars) for the analysis of air regulations. This estimate was derived from the range of values estimated in three meta-analyses of VSL conducted after EPA's Guidelines were published in 2000 (Mrozek and Taylor (2000), Viscusi and Aldy (2003), and later, Kochi, et al. (2006).) However, the Agency neither changed its official guidance on the use of VSL in rule-makings nor subjected the interim estimate to a scientific peer-review process through the Science Advisory Board (SAB) or other peer-review group.[2]

Data for these studies frequently include wage data from the Current Population Survey and workplace risk data from the Census of Fatal Occupational Injuries. Both sets of data are collected on behalf of the Bureau of Labor Statistics.[6]

As an example, the EPA's retrospective study of the clean air act, which focused "primarily on the criteria pollutants sulfur dioxide, nitrogen oxides, carbon monoxide, particulate matter, ozone, and lead", found that the benefits of the program, mostly from improvements to health, outweighed the costs:

The direct benefits of the Clean Air Act from 1970 to 1990 include reduced incidence of a number of adverse human health effects, improvements in visibility, and avoided damage to agricultural crops. Based on the assumptions employed, the estimated economic value of these benefits ranges from $5.6 to $49.4 trillion, in 1990 dollars, with a mean, or central tendency estimate, of $22.2 trillion. These estimates do not include a number of other potentially important benefits which could not be readily quantified, such as ecosystem changes and air toxics-related human health effects. The estimates are based on the assumption that correlations between increased air pollution exposures and adverse health outcomes found by epidemiological studies indicate causal relationships between the pollutant exposures and the adverse health effects.
The direct costs of implementing the Clean Air Act from 1970 to 1990, including annual compliance expenditures in the private sector and program implementation costs in the public sector, totaled $523 billion in 1990 dollars.

The value of improvements to health conditions were converted to dollars by estimating the resulting decrease in the incidence of fatalities and valuing this change using estimations of the VSL from the literature. A table of specific values used for the various improvements in health can be found in the report's executive summary.

Tobacco industry

The cigarette industry was particularly concerned with value of life calculations since it came under regular attack in the 1980s and 1990s for the "social cost" of smoking on the national economy. The economic argument for increasing excise taxes on cigarettes was that these taxes compensated the state for a whole range of externalities that smoking imposed, including the costs of hospital and medical care for smokers and non-smokers alike, disability pensions for smoking-related diseases, welfare payments made to surviving spouses, the cost of street, home and office cleaning, the burden of home and forest fires, etc.

To counter this argument, the tobacco industry was increasingly forced to fall back on calculations made by a network of employed academics, who were paid to write op-ed articles for their local newspapers expressing the opinion that smokers already 'paid their way'. They relied on an argument by Kip Viscusi which became known as the "death benefits"—the idea that, since smokers died earlier than non-smokers, the nation was being saved hospital, pension and nursing-home costs, and that these offset many of the external costs (depending on how these are calculated).

Uses

Since resources are finite, trade-offs are inevitable, even regarding potential life-or-death decisions. The assignment of a value to individual life is one possible approach to attempting to make rational decisions about these trade-offs.

When deciding on the appropriate level of healthcare spending, a typical method is to equate the marginal cost of the healthcare to the marginal benefits received. In order to obtain a marginal benefit amount, some estimation of the dollar value of life is required. However the level that can be done is limited by available resources. So even though it may be 'beneficial' to spend more it is not possible, or else requires deficit spending which causes other intended consequences that are hoped to be less.

The rational strategy is to determine how much can be spent on saving lives and then allocating it to the most beneficial ways until the money is fully allocated.

In risk management activities such as in the areas of workplace safety, and insurance, it is often useful to put a precise economic value on a given life. There can be no such thing as a perfectly safe or risk free system—one can always make a system safer by spending more money. However, there are diminishing returns involved.

In transportation modes it is very important to consider the external cost that is paid by the society but is not calculated, for making it more sustainable. The external cost, although consisting of impacts on climate, crops and public health among others, is largely determined by impacts on mortality rate.

Estimates of the value of life

Equivalent parameters are used in many countries, with significant variation in the value assigned.[7]

Australia

In Australia, the value of a statistical life has been set at:

New Zealand

In New Zealand, the value of a statistical life has been set at:

Russia

According to different estimates life value in Russia varies from $40,000 up to $2 million. On the results of opinion poll life value (as the cost of financial compensation for the death) in the beginning of 2015 was about $71,500.[10]

United States

The following estimates have been applied to the value of life. The estimates are either for one year of additional life or for the statistical value of a single life.

The income elasticity of the value of statistical life has been estimated at 0.5 to 0.6.[4] Developing markets have smaller statistical value of life.[4] The statistical value of life also decreases with age.[4]

Historically, children were not valued very much but modern cultural norms attach a much higher value.[18]

Criticisms

There are also intergenerational aspects to the value of life. Some economists calculate social discount rates based on the interest rates prevalent in financial markets. The higher the social discount rate, the more future generations are devalued relative to the current generation.

The anti-globalization movement objects to the obvious disparity between the value assigned to life in developed nations versus developing nations—most particularly as reflected in World Bank, World Trade Organization (WTO), and International Monetary Fund (IMF) decisions. They point to such numbers as the Intergovernmental Panel on Climate Change (IPCC) assumption that a developed nation can pay fifteen times more than a developing nation to avert a death due to climate change, as evidence of systematic neglect of the value of statistical life in the poorer South, as opposed to the more developed North. Some also fear that more standard global value of life mechanisms could have consequences for the working people in the developed nations.

See also

References

  1. 1 2 "Best Practice Regulation Guidance Note: Value of statistical life" (PDF). Department of the Prime Minister and Cabinet. December 2014.
  2. 1 2 3 "Mortality Risk Valuation". EPA. Retrieved 2017-04-25.
  3. ↑ Mankiw, Gregory (2012). Principles of Economics. ISBN 978-0-538-45305-9.
  4. 1 2 3 4 Viscusi, W. Kip; Aldy, Joseph E. (2003). "The Value of a Statistical Life: A Critical Review of Market Estimates Throughout the World". JOURNAL OF RISK AND UNCERTAINTY. 27 (1): 5–76.
  5. ↑ Murphy, James; P. Geoffrey Allen; Thomas H. Stevens & Darryl Weatherhead (August 2004). "A Meta-analysis of Hypothetical Bias in Stated Preference Valuation". ENVIRONMENTAL AND RESOURCE ECONOMICS. 30 (3): 313–325. doi:10.1007/s10640-004-3332-z.
  6. ↑ Mrozek, J.R.; Laura Taylor (2001). "What Determines the Value of Life? A Meta-Analysis". Journal of Policy Analysis and Management. 21 (2): 253–270. doi:10.1002/pam.10026.
  7. ↑ Miller, Ted R (May 2000). "Variations between Countries in Values of Statistical Life" (PDF). Journal of Transport Economics and Policy. 34: 169–188. ISSN 0022-5258. Retrieved 30 April 2017.
  8. 1 2 "Social cost of road crashes and injuries 2016 update" (PDF). NZTA. March 2017.
  9. ↑ "Value of Life". Guide to Social Cost Benefit Analysis. The Treasury. 2015.
  10. ↑ "Стоимость человеческой жизни в России в 2015 году составила 4,5 млн. рублей" (PDF). Center for Strategic Researches RGS.
  11. ↑ Hirth, Richard A. (2000). "Willingness to pay for a quality-adjusted life year: in search of a standard". Medical Decision Making. 20.3: 332–342.
  12. 1 2 Kingsbury, Kathleen (20 May 2008). "The Value of a Human Life: $129,000". time.com.
  13. ↑ Lee, Chris P. (2009). "An Empiric Estimate of the Value of Life: Updating the Renal Dialysis Cost-Effectiveness Standard". Value in Health. 12(1): 80–87.
  14. 1 2 Appelbaum, Binyamin (Feb 16, 2011). "As U.S. Agencies Put More Value on a Life, Businesses Fret". The New York Times.
  15. ↑ "Guidance on Treatment of the Economic Value of a Statistical Life" (PDF).
  16. ↑ "Guidance on Treatment of the Economic Value of a Statistical Life in U.S. Department of Transportation Analyses" (PDF).
  17. ↑ "DoT 2016" (PDF). 2016-08-08. Retrieved 2017-04-23.
  18. ↑ Mayyasi, Alex. "How Children Went from Worthless to Priceless". Priceonomics. Retrieved 8 July 2016.

Further reading

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