The Compassionate Logic of Pricing Human Life
(Bloomberg Opinion) -- One of the unloveliest ideas in economics goes by the name “value of a statistical life” — VSL for short. In the U.S. government, the current value of a human life is about $10 million.
That means that if a highway safety regulation would save 10 lives, it is worth $100 million — a figure that must be weighed against the regulation’s cost.
Because the government’s decisions often depend on the outcome of cost-benefit analysis, the VSL is important. It helps determine whether and when people will be protected from dirty air, dangerous workplaces, unsafe drinking water and unhealthy food.
A lot of people rebel against the idea of assigning a monetary value to a human life. In a provocative new book, the New York Times editorial writer Binyamin Appelbaum associates that idea with an assortment of others that he abhors, and through which economists have (in his view) contributed to rise of intolerable inequality.
Some of Appelbaum’s charges might be right, but he’s wrong about VSL. Any government is inevitably going to assign monetary values to mortality risks. Doing that need not promote inequality in any way. Actually it can combat inequality — and increase safety in the process.
Consider a concrete problem, loosely based on a long-standing debate about the regulation of arsenic in drinking water.
Suppose that the Environmental Protection Agency is considering three possible regulations. The first, and the least aggressive, would save 30 lives per year. The second would save 40 lives per year. The third, and the most aggressive, would save 50 lives per year.
Not surprisingly, the first would be the least expensive, costing $240 million per year. The second would cost $800 million per year. The third would cost $2 billion per year.
Would you support some kind of regulation? If so, which option would you choose?
Whatever your answer is, you’re inevitably assigning some kind of monetary value to lives saved. If you choose the least expensive approach, you’re saying that it’s worthwhile to spend $8 million per life saved — but not $20 million or more. If you choose the most expensive approach, you’re saying that you’re willing to mandate an expenditure of $40 million per life saved.
How should we figure out which number is right? To understand current practice, it’s crucial to see that the government isn’t really assigning a monetary value to human lives. It’s instead trying to assign a monetary value to statistical risks.
The current figure of $10 million comes from a variety of economic studies appearing to show that in actual markets, workers and consumers generally demand, and are paid, about $100 to face a death risk of 1 in 100,000, or $1,000 to face a death risk of 1 in 10,000. Economists tend to prefer actual markets and to be suspicious of surveys, on the grounds that people’s answers to hypothetical questions are unreliable. But if you ask people how much they would pay to eliminate a risk of 1 in 100,000, you shouldn’t be surprised if the average comes in around $100.
Sure, it’s possible to raise questions about evidence of these kinds. Do workers and consumers even know when they’re facing a death risk of 1 in 100,000? Isn’t their bargaining power limited? And why shouldn’t companies, imposing mortality risks on people, pay out a lot more than workers and consumers are able to obtain in the marketplace?
These are legitimate questions. But to see why the current approach isn’t at all crazy, return to the case of arsenic. When a drinking-water regulation is imposed, its cost is likely to show up on people’s water bills. If you require people to spend $200 to eliminate a risk of 1 in 100,000, it is not at all clear that you are helping them. Maybe they want to spend that money on something else. After all, there are a lot of 1-in-100,000 risks out there.
If you ask people to spend $200 on each of those risks, you will probably be diverting their money from higher-priority items. And if you require large expenditures on low-probability risks, you’ll be hurting poor people in particular — if only because they don’t have a lot of money to spend. Here is the key point: Government doesn’t do poor people a favor, or promote equality, if it forces them to pay a lot more for safety than they’re willing to pay.
To be sure, you might think it’s terribly unfair if consumers end up paying the cost of cleaner drinking water. If public officials can find a way to charge the water companies without hurting consumers, it might be a lot better. But as a practical matter, finding that way might be impossible. And if you do end up charging the water companies, you might hurt their employees — ensuring that they suffer from reduced wages or fewer jobs.
Critics of VSL, including Appelbaum, want more redistribution of resources from those at the top to those at the bottom. On that score, they’re right. But trying to proceed without a VSL is not a sensible way of getting there.
Trade-offs are inevitable, which means that a VSL is inevitable too. If you care about economic inequality, you can’t wish them away.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Cass R. Sunstein is a Bloomberg Opinion columnist. He is the author of “The Cost-Benefit Revolution” and a co-author of “Nudge: Improving Decisions About Health, Wealth and Happiness.”
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