January 30, 2020
In evaluating whether a proposed regulation will have net benefits, economists typically conduct a cost-benefit analysis. For regulations that are likely to impact human life and safety, that can involve putting a dollar value on human lives that may be saved or lost. A common way to do this is using the value of a statistical life—or VSL—which is based on what current citizens are willing to pay to reduce mortality risks.
Although the VSL is commonly used in policymaking today, there are a number of conceptual problems with the metric. This research by James Broughel explores the key issues underlying the VSL, including problems with the broader practice of monetizing nonmarket goods by using measures of consumer willingness to pay. He finds that the VSL is not a theoretically sound way to value human lives for several key reasons:
- The VSL leads economists to underestimate the opportunity cost of resources that could be better spent elsewhere.
- The VSL cannot account for the difference in value between statistical lives and specific identifiable ones.
- The VSL does not account for the time value of money—the idea that resources today will be worth more in the future if allowed to earn interest.
- The VSL may overlook the preferences of future generations in favor of the current generation.
Because of these theoretical issues, the author finds that the VSL is poorly suited to policymaking. Instead, he proposes the use of a financial approach to valuing lives. This approach would measure life’s value based on a person’s productive financial contributions over time. Essentially, it would value life based on how much money is saved by preventing a death. Such an approach would overcome many of the issues with the VSL. It may also be less controversial because it would apply dollar values to goods and services rather than to people.
The author concludes with a discussion of the importance of using an accurate measure of the value of life. If an inaccurate assessment of the value of life continues to be used in policymaking, this can result in regulations being enacted that have real costs for citizens and that do not deliver their promised benefits. Using a more accurate assessment of the value of life would likely benefit citizens by only allowing regulations to be enacted that have positive net benefits for society.