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a blog from young economists at Nova SBE

What is that thing which is behind regulations and beyond economics?

A few days ago I received in my inbox an email from Greenpeace about the recent disaster in the Philippines claiming how climate change and the failure to adopt tight enough environmental regulations lead to the higher frequency of natural disasters across the world. So one should ask: what is beyond the acceptance or denial of environmental regulations?

Well, it turns out that most governmental agencies in developed countries (namely the US) use a concept coming from Economics of Health to assess the need of environmental regulations and perform Cost-Benefit Analyses (CBA): the Value of a Statistical Life (VSL).

We need these type of measures to perform CBA because associated with all regulations there are enforcement costs. For instance, setting a cap to any car’s CO2 emissions may lead to the need of buying more expensive motors, which take productions costs up and eventually result in unemployment.  Thus, having an idea of what society is prepared ex ante to pay to avoid the death of an unidentified individual provides a benchmark for decision-making. There are different methods to compute the VSL, but they all try to answer the question of how much each individual is prepared to pay for a given reduction in the risk of premature death.

THE WORST FORM OF MEASURING LIFE

My argument in this blog entry, taking inspiration from Winston Churchill, is that for the purposes of CBA the VSL Method is perhaps the worst form of measuring life, except all the others. I make this argument because this method has many drawbacks: if computed using wage differentials it can hardly be used among population too young or too old to work, it is conditional on workers knowing the risks of their jobs and external factors such as the unemployment rate, it is easily subject to government manipulation and country-dependent.

This is why the VSF of a Filipino is much lower than that of an American and this might help explain why do more developed economies like the US fail to adopt the right environmental regulations that could prevent climate change and hurricanes like the one portrayed in the picture above.

However, this method provides us a simple-enough way for populations to understand decision-making and for governments to perform CBA.

CONCLUSION

The way we value life is intrinsically connected with ability to enforce the regulations that will make our life better, so to a good extent the more we value our life the better will be our life standards. In the end, the value of life is that thing which is behind regulations and beyond economics. So, when considering whether or not to pass regulations we need to take into account not only the numbers coming from VSL analyses, but also values chosen on moral grounds.

 

REFERENCES

STATS Articles 2011 (here)

Mortality risk valuation, OECD 2012 (here)

How much is a life worth? (here)

The Political Valuation of Life (here)

Priceless Book (here)

 

Student

João Rafael Brites

Masters in Economics

CEMS MIM Masters in International Management

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Author: studentnovasbe

Master student in Nova Sbe

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