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Value of Life, Economic

VALUE OF LIFE, ECONOMIC


Many public sector investment and regulatory decisions have significant effects–typically, but not invariably, beneficial–on the safety of human life. It therefore follows that if a society's scarce resources are to be allocated efficiently and to greatest advantage, then that society requires some means of associating explicit monetary values with safety, and costs with risk. This allows safety effects to be weighed against the other costs and benefits of the investment or regulation, or against other expenditures affecting public welfare.

Plainly, if such explicit monetary values of safety and costs of risk are not applied, it is virtually inevitable that there will be a degree of randomness in the way in which scarce resources are utilized. A measured, strategic approach to safety and risk is optimal.

Defining Monetary Values of Safety

Over the years a number of different approaches have been proposed for defining and estimating values of safety and costs of risk. Two of these deserve serious consideration: the so-called gross output (or human capital) approach and the willingness-to-pay approach.

Under the gross output approach, the cost of the premature death of an individual is treated as the sum total of the monetary value of the individual's future output that is extinguished as the result of his or her premature demise. In some cases advocates of the gross output approach recommend the addition of a more or less arbitrary allowance for the pain, grief, and suffering of the victim and his or her surviving dependents and relatives. In turn, the value of preventing premature death is treated as the cost avoided. As an example of the sort of figures that emerge under the gross output approach, the British Department of Transport's most recent gross output-based cost of an average fatality was £180,330 in 1985 prices (roughly $270,000), of which about 28 percent was an allowance for pain, grief, and suffering.

To the extent that it effectively treats human beings as little more than pieces of productive capital equipment, it is not surprising that the gross output approach has been the subject of fairly vigorous criticism. (It was, in fact, abandoned by the Department of Transport in 1988 in favor of the willingness-topay approach discussed below.)

It has been argued that most people value safety not because of a desire to preserve current and future productive potential, as the gross output approach implies, but rather because of an aversion to the prospect of premature death per se. This suggests that values of safety and costs of risk should be defined in such a way as to reflect people's pure preferences for safety. But to do so requires some means of measuring the extent of a person's preference–and more particularly the strength of that preference–for safety.

A natural measure of a person's strength of preference for a good or service is the maximum amount that he or she would be willing to pay for it. This sum is a clear indication of what the good or service is worth to the person, relative to other potential objects of expenditure. Moreover, since willingness to pay is conditioned by ability to pay (i.e., income), the sum concerned takes account of the resource constraints that society inevitably faces.

Under what has come to be known as the willingness-to-pay (WTP) approach to the valuation of safety, the monetary value of a safety improvement is defined as the aggregate amount that the group of people affected by the improvement would be willing to pay for the (typically very small) reductions in individual risk that result from the improvement. For example, suppose that a group of 100,000 individuals are each afforded a 1 in 100,000 reduction in the risk of premature death during the forthcoming year, thereby preventing one premature death, on average. (This is referred to as the prevention of one "statistical death" during the period concerned.) Suppose, furthermore, that individuals in the affected group would, on average, each be willing to pay a maximum of $10 for the safety improvement. Aggregated over the group of 100,000 individuals, total willingness to pay would be $1 million; this sum is referred to as the value of preventing one statistical fatality (VPF) or the value of statistical life (VOSL). Correspondingly, costs of risk are defined in terms of the aggregate amount that affected individuals would be willing to accept as compensation for (typically small) increases in the risk.

It is important to appreciate that, defined in this way, the VPF is not the price of life in the sense of a sum that any one individual would accept as compensation for the certainty of his or her own immediate death: For most people, no finite sum would suffice for that purpose.

Estimating Monetary Values of Safety

How are willingness-to-pay-based values of safety to be estimated in practice? Since the early 1970s, an extensive literature has developed on this subject. For a detailed survey see Michael Jones-Lee (1989), Chapter 2, or W. Kip Viscusi (1993). The body of literature broadly divides into two approaches, which can be viewed as complementary rather than competing.

In the first approach, researchers seek to identify situations in which people actually do trade off wealth or income against risk, as in labor markets where riskier occupations can be expected to command clearly identifiable wage premiums, and safer ones carry corresponding discounts. The two main difficulties with this approach are that wage rates depend on many other factors besides job risk, so that it is necessary to control for the effects of these other factors in identifying the pure wealth-risk tradeoff. A second and arguably more fundamental problem is that workers may have only a limited knowledge of the job risks that they actually face.

By contrast the second approach, known as contingent valuation, aims to ask a representative sample of the population more or less directly about their willingness to pay for improved safety or willingness to accept compensation for increased risk. While this approach has the advantage of getting directly to the wealth-risk tradeoff, it does rely upon the somewhat debatable assumption that people are able to think rationally about hypothetical situations, and respond in an unbiased manner to relatively unfamiliar questions.

Under the contingent valuation approach, willingness-to-pay-based values for the prevention of a statistical fatality in the British case are in the region of £1–2 million ($1.5–3.0 million). (The Department of Transport's figure as of 2002 is £1.14 million at 2000 prices.) The labor market wage premium-for-risk approach yields values that are not grossly dissimilar but typically larger.

Conclusion

Any attempt to place an explicit monetary value on human life raises a variety of difficult ethical and empirical questions. Some of these are discussed in detail in the works of John Adams (1995) and John Broome (2002). Nonetheless, it is a fact of life that safety improvements resulting in the avoidance of statistical death are rarely costless; careful public sector decisions in this area must confront these issues.

See also: Disease, Burden of; Risk.

bibliography

Adams, John. 1995. Risk. London: UCL Press.

Broome, John. 2002. Weighing Lives. Oxford: Oxford University Press.

Jones-Lee, Michael. 1989. The Economics of Safety and Physical Risk. Oxford: Blackwell.

Viscusi, W. Kip. 1993. "The Value of Risks to Life and Health." Journal of Economic Literature 31:1,912–1,946.

M.W. Jones Lee

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