Valuing Reductions in Mortality Risk

Many environmental policies benefit society by reducing the risk of premature mortality. Air quality regulations lower concentrations of particulate matter that can trigger respiratory and cardiovascular causes of death. Regulations of toxic chemicals and hazardous waste sites reduce exposure to carcinogens and the probability of fatal cancers. Improving water quality can likewise better human health and lower mortality risk. 

Evaluating the economic benefits of mitigating these risks requires estimates of individuals' willingness to pay for mortality risk reduction. The typical term used in policy applications for this income-risk trade-off is the Value of Statistical Life (VSL). This reflects the economic value to society, as evident by the aggregation of individuals' willingness to pay to reduce risk, to prevent one premature death. Suppose that, on average, individuals value a 1 in 10,000 risk reduction by $500. Aggregated over a population of 10,000 individuals, society would derive the benefit of $5 million to avoid one statistical fatality. This fatality is "statistical" because we do not know, ex ante, whose life would be saved by this risk reduction, but we would expect one person out of this population of 10,000 to have his or her life extended by the reduction in risk. Thus, this $5 million is the value of statistical life for this population.

The Aldy and Viscusi paper reviews studies that estimate risk reduction benefits by analyzing the everyday market behavior individuals undertake that reveal their income-risk preferences. This line of analysis focuses primarily on the compensation workers receive for bearing a small probability of dying on the job. They find that the value of a statistical life follows an inverted-U shape for workers between 18 and 62 years of age, peaking for those around age 40. This work suggests that a more sophisticated approach to valuing risk reductions would account for the ages of all those affected, instead of simply making a senior discount adjustment for the oldest population. They illustrate the implications of this approach by re-estimating the benefits of the Clear Skies Initiative.

The Krupnick paper reviews studies that estimate the benefits for reducing risk through survey methods that require individuals to state how they would tradeoff income with a small change in mortality risk. These survey studies typically present information about a risk reduction program and then ask survey participants whether they would be willing to pay a specified amount (for purchasing a product with mortality risk reduction benefits) for the program. Some of these studies support a senior discount, some do not. And the best studies are found on both sides of this debate. He concludes that the stated preference evidence rules our a proportional decline in the VSL with age but that otherwise, the literature is not sufficient to apply a senior discount to regulatory benefits estimates.