Welcome to the RFF Weekly Policy Commentary, which is meant to provide an easy way to learn about important policy issues related to environmental, natural resource, energy, urban, and public health problems.
This week RFF senior fellow Alan Krupnick discusses how a monetary value might be attached to reductions in mortality risks from pollution control or other public health policies in low-income countries, which is critical for sorting out policies that do and do not make sense from a cost/benefit perspective. This is a very contentious issue even in the United States, let alone other countries; for example, the Environmental Protection Agency typically assumes about $6 million per value of statistical life to help value the health benefits from environmental improvements, while the Department of Transportation uses a value of approximately $3 million to quantify the gains from better road safety.
To help prioritize policies and to design better regulations, cost-benefit analyses are commonly performed in developed countries and increasingly in developing ones. When it comes to environmental priorities and policies, health effects, especially mortality risks are often involved. For example, reducing fine particulates, a form of air pollution, has been shown to have a significant effect on reducing death rates from lung cancer and other diseases. To compare the benefits and costs of various policies, however, it is not enough to know about the mortality risks. They must be "monetized," that is, converted into monetary units, so they can be compared to costs. Indeed, how strongly the public feels about reducing their mortality risks, relative to doing all the other things we can do with our money or expect our government to do, is important, even if one were not doing cost-benefit analyses of regulatory programs.
These preferences are summarized in the term "value of statistical life" (VSL), which simply is the average amount that people are willing to pay to reduce their risks of death by a tiny amount, divided by the amount of this risk reduction. If a million people are willing to pay $10 on average to reduce their risks of death by one in a million (thereby expecting that one among them will not die prematurely), this translates into a VSL of $10 million ($10/1/1,000,000). Such a number can then be multiplied by the number of premature deaths expected to be cut by, say, a fine particulate policy, to arrive at the mortality benefits of reducing this pollutant.
|Note what this number is not. It is not the amount you would pay to save your grandmother's life, nor the life of a known person. It is not a jury award that the family of a person killed in a wrongful death suit would receive. It is about using a money metric to measure how strongly people feel about reducing their risks of death by a small amount - something they do every time they push their foot down on the accelerator to get to a meeting faster, or cross in the middle of the street to save time. These time-risk tradeoffs are easily converted to money terms. Indeed, some people commonly take more risky jobs, like washing windows on skyscrapers in return for a wage boost over what they could get exercising the same skills on the ground.
To date, most VSL estimates have been made in developed countries. But people's feelings about avoiding death risks are universal - although the strength of this feeling, as expressed in money will depend on many things, some of which may vary systematically across developed and developing countries. For example, wealthier people, other things held equal, are willing to pay more for reducing death risks. Older and ill people may be willing to pay more or less than younger and healthy people - although how much, and even in what direction, are open questions. This difference is important because developing countries typically have a much greater proportion of younger and sicker people than developed countries. The types of risks can matter too: how large they are, what type (is it something you have control over or a risk that's unfamiliar?) and when they kick in (now or in the future).
Arguably, it is even more important to do good benefit-cost analyses in developing than developed countries because the former have such a shortage of capital and resources to devote to improving the quality of life. There are two ways to get estimates of the VSLs. One is to actually do the studies. Here there are two credible approaches - asking people, using highly structured surveys, about their willingness to pay (that is, their "stated" preference) or examining their "revealed" preferences in labor markets (in terms of jobs chosen) and similar places where tradeoffs between money and death risk may be observed. The other option is to transfer estimates of the VSL from developed to developing countries, which is the standard practice because it is so cheap to do although not without costs in terms of being inaccurate.
My colleagues and I recently carried out a revealing study in Shanghai and Chongqing, China, using methods and a survey nearly identical to those used in the United States, Canada, Great Britain, Japan, Italy, and France, to value reductions in mortality risk. Our findings showed that in spite of the lower per-capita incomes in China, the VSL was not much different from the results in the above developed countries - about $1 million (when adjusting the yuan for purchasing power parity). Further, unlike these countries, the VSL applicable to future risk reductions, such as one would get from reducing exposure to a carcinogen today, was not much lower than the VSL for more immediate risk reductions. A conclusion: the Chinese people are much more future-oriented than their counterparts in the other countries we tested. At the same time, there were commonalities. Older people (over 70) are consistently shown in these surveys to be willing to pay somewhat less than younger people (40-70), although these differences are not always statistically significant. Ill people are also shown to be willing to pay more or the same, but never less than healthy people. And incomes matter within the countries, that is, richer people within a country are willing to pay more to reduce a given risk of death than poorer people in that country. However, in the case of our China study, cultural factors, possibly optimism about the future or a great fear of death, may act to push up willingness to pay even with lower incomes.
At the end of the day, these kinds of studies reveal more to us than simply how the VSL varies; they show how cultural differences translate into preferences for improving health and thereby result in a better allocation of our scarce resources. For example, the China results have already been applied to a major World Bank study assessing the health damages of air pollution. The study's key finding is that high particulate levels (China has 20 cities in the top 30 most polluted cities in the world) cause mortality damages equal to about 3 percent of GDP. In India, which accounts for 30 percent of the global burden of tuberculosis, the costs of interventions per death prevented are as cheap as $1,000, cluster around $10,000 and are as high as $1 million. With a VSL of say, $1 million, all or most of these mortality risk reduction measures would deliver net benefits to society.
Views expressed are those of the author. RFF does not take institutional positions on legislative or policy questions.
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To learn more about RFF's work on valuing reductions in mortality risk in general and new articles by RFF's Joe Aldy and Alan Krupnick, and Kip Viscusi in The Review of Environmental Economics and Policy (Vol. 1, No. 2, 2007).
Alberini, Anna, Maureen Cropper, Alan Krupnick and Nathalie Simon. "Does the Value of Statistical Life Vary with Age and Health Status? Evidence from the U.S. and Canada." Journal of Environmental Economics and Management. Forthcoming in 2007.
China SEPA and World Bank. 2007. "Cost of pollution in China: economic estimates of physical damages."
Dye, C. and K. Floyd. 2006. "Chapter 16: Tuberculosis" in Disease control priorities in developing countries. Second edition. Edited by D. J. Jamison, J. G. Breman, RFF's Ramanan Laxminarayan and others. A co-publication of The World Band and Oxford University Press.
Krupnick, A., S. Hoffmann, B. Larsen, X-Z. Peng, G.-C. Cheng, et al. 2007. "The Willingness to Pay for Mortality Risk Reductions in Shanghai and Chongqing, China" in the Costs of Pollution in China, The World Bank. Forthcoming
Krupnick, Alan, Maureen Cropper, Anna Alberini, Nathalie Simon, Bernie O'Brien, and Ronald Goeree. 2002. "Age, Health and the Willingness to Pay for Mortality Risk Reductions: A Contingent Valuation Survey of Ontario Residents." Journal of Risk and Uncertainty. March, Vol. 24, No. 2. pp. 161-175.