How Economists Put A Price Tag On Your Life

 

By James Broughel. He is a senior research fellow at the Mercatus Center. Excerpts:

"One common metric economists rely on is the value of a statistical life (VSL), which is a measure of how much money a group of individuals is willing to pay to reduce the probability of its members dying. For example, workers in a relatively dangerous industry like construction receive higher wages than they might otherwise get elsewhere. Given the statistical realities involved, one can add up the excess wages earned by workers in exchange for taking a riskier job to ascertain how much as a group they jointly place on a life lost in their industry.

One claim sometimes made by public health experts, regulators, and even from some economists is that when they use the VSL, they are only putting a dollar value on “risk,” not on anyone’s actual life."

"Is it true that when economists employ the VSL, they are not placing a dollar value on individual lives?

To start, consider a hypothetical: Let’s say for the sake of argument that air pollution in a city affects a population of 1 million people. Over the course of a lifetime, four people in the population die early from causes related to air pollution, and the deaths are more-or-less random. Thus, each member of the population faces a 1-in-250,000 risk of death. 

Now let’s say that government planners decide to implement a public health regulation that they expect will reduce the number of people who die prematurely from air pollution from four to two. Furthermore, let’s say the city’s 1 million people are each willing to pay $20 for this reduction, which lowers any particular individual’s chance of dying from 1-in-250,000 to 1-in-500,000. Collectively, therefore, the city’s population is willing to pay $20 million, or $10 million for each person saved."

"As a group, the population is indeed placing a dollar value on specific, individual lives. Whether its “risk” or “lives” that is valued is semantics in this case."

Related post

Obscure Model Puts a Price on Good Health—and Drives Down Drug Costs. (it discusses QALY, for “quality-adjusted life year”)

"One year spent in perfect health equals one QALY. A year with some kind of health problem that affects quality of life would be worth less than one QALY." 

So if a drug adds years of life or improves the health of remaining years that counts as so many QALYs and the price is based on that