Reading the posts on the topic “How to value life”, a topic that I find particularly challenging, I find several confused and confusing economic reasoning and statements on the subject. The main areas of confused arguments are related, firstly, to the concept of economic valuation, and secondly, to the meaning of the value of a statistical life (VSL).
Contrary to what is said or implicit in most blog posts neither human actions nor economic value theory contradict the fact that” life is priceless”.
Life/death human choice decisions are neither common nor usual economic decision. Fortunately, suicide (even in the form of euthanasia) and kidnaping are rare phenomenon and, apart from abortion laws, protection of life crimes is enforced by law in most modern states.
Anyway, using economic theory to value life in monetary terms is a possible (although awkward) exercise. The correct concept to measure the opportunity cost of life is our “WTA being killed” (i.e. the compensation variation, because “alive” is the status quo). If this value was to be estimated on average for a particular population it will most probably be a very high value, probably ∞, “priceless”, due to the fact that it is not income restricted.
More common human choices are those related with living in a higher or lower life risk environment. Here, in fact, human (in some cases economic) choices reveal positive WTP (WTA) to decrease (increase) life risk environment and those revealed values can be used to evaluate public policies. The Value of a Statistical Life is based on these revealed choices but we need to correctly understand the limits of this useful tool.
First, what VSL is not! It is not the economic value of a particular life. It is not even the economic value of a statistical life.
So, what is VSL?
It is a convention that provides a low cost although highly imperfect proxi to the monetary value of a statistical life. It can be used to value the impact of public spending on life risk changes.
The math formula is: VSL= MWTP or MWTA (estimated for a particular revealed or stated change in risk ) divided by that particular risk change.
Therefore, VSL is what a large number of similar people would together pay to eliminate the risk that is expected to kill one of them randomly in a given period (Stavins, 2005).
Note that there is no need to use VSL to evaluate public policies. Instead, we could estimate the marginal valuations of risk reduction for each particular project, and use directly those estimated values. However, this is an expensive solution that in most studies would not be justifiable.
Note also that, VSL is not even in technical terms the economic value of a statistical life, because MWTP or MWTA ( the numerator) are not constant :
a) over different risk base lines (ex: 1/500,000 or 1/ 2,000,000)
b) nor over different incremental risk changes 1/500,000 or 3/500,000
c) nor equal between an increase or a decrease in life risk. Life risk changes are likely to have very different WTP and WTA ( Haneman (1991)).
In this case, as in all economic valuation, individual WTP (WTA) depends on the particular marginal choice under analysis, information of present and future consequences, preferences, status quo income distribution and risk environment…. Consequently, as humans live in different economic conditions, cultures and environments their average WTP (WTA) will be different, implying different VSL. In this context, economic theory is a very usefull tool to rationalize public spending choices but nothing else, because even if correctly understood and applied many ethical problems persist and society has to deal with them.
Clara Costa Duarte