Frequently Asked Questions on Mortality Risk Valuation
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In benefit-cost analysis EPA often must try to estimate the value of improved health or reduced risk from environmental contaminants. One way of expressing some of these benefits is through the use of what has become known as the "value of statistical life," often abbreviated as VSL. This page contains Frequently Asked Questions concerning the use and measurement of the value of a statistical life as it is applied in EPA economic analyses and how EPA evaluates reduced health risks.
Why does EPA place a value on life?
What is Benefit Cost Analysis?
What is Benefit Cost Analysis used for?
What is the “Value of a Statistical Life”?
Why does EPA use a Value of Statistical Life?
How does EPA Estimate the Value of Statistical Life?
What Value of Statistical Life does the Agency Use?
What studies has EPA reviewed to reach these estimates?
What is the current process for updating the Agency’s estimates?
What other values has the Agency used in the past?
What adjustments are made to the VSL estimates at EPA?
References
Additional sources of information on Mortality Risk Valuation from NCEE
Why Does EPA Place a value on life?
The EPA does not place a value on life, but EPA does try to estimate the benefits from reducing the risk of death from environmental contaminants. While these reductions in risk are generally relatively small for any one person, they often affect a large number of people. For benefit-cost analysis, the question is: How do people value, in dollar terms, this small (but important) reduction to their risk of dying?
Many economics studies attempt to answer similar questions. EPA uses the estimates from these studies to evaluate the health benefits of environmental policies. Other federal and state agencies also try to estimate the benefits of their risk-reducing policies in dollar terms.
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What is Benefit Cost Analysis?
Benefit-cost analysis is a tool used to evaluate policy actions as the private market might do. Benefits are what consumers would be willing to pay for risk reductions or for other improvements from pollution reduction. Costs are determined by the value of the resources directed to pollution reduction. If benefits are greater than costs, then the policy “passes” a benefit-cost test.
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What is Benefit Cost Analysis used for?
The primary purpose of benefit cost analysis is to provide policy makers and others with detailed information on a wide variety of consequences of environmental policies. Presidential Executive Orders have required or encouraged its use in policy evaluation since the early 1980's. Some environmental statutes allow benefit cost analysis in setting standards (e.g., the Safe Drinking Water Act) while others prohibit its use in standard setting (e.g., the Clean Air Act).
Benefit-cost analysis is only one of many inputs into policy evaluation. Other factors include environmental justice considerations; ethical concerns; enforceability; legal consistency; and whether it is politically, institutionally, and technically feasible.
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What is the “Value of a Statistical Life”?
The “value of statistical life (VSL)” refers to the aggregate value of reducing small risks across a large number of people. It is based on how people value reducing these risks and is best explained with an example.
Suppose a policy affects 100,000 people and reduces the risk of premature death by 1 in 100,000 for each individual. Summing these individual risks across the entire affected population results in 1 life “saved” from the policy. We refer to this as a “statistical life saved” because while, on average we expect one person to live longer than they would otherwise, we don't know who this person will be.
To estimate the benefits of this policy in dollar terms, we look to how people value reducing their risks of dying. Suppose each of the 100,000 people would be willing to pay $500 for the risk reduction. The total willingness to pay would be $5 million (=$500 * 100,000 people). So ,we would say that, in this case, the “value of statistical life” is $5 million.
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Why does EPA use a Value of Statistical Life?
EPA uses a value of statistical life so it can perform benefit-cost analysis of its policies and regulations. The benefits and costs in a benefit-cost analysis must both be in dollar terms in order to determine if benefits exceed costs. The value of statistical life is one way to put risk-reduction benefits in dollar terms.
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How does EPA Estimate the Value of Statistical Life?
For decades economists have been studying how people make tradeoffs between their own income and risks to their health and safety. These tradeoffs can reveal how people value, in dollar terms, small changes in risk. For example, purchasing automobile safety options, reveals information on what people are willing to pay to reduce their risk of dying in a car accident. Purchasing smoke detectors reveals information on what people are willing to pay to reduce their risk of dying in a fire. EPA reviews those studies that are in published scientific literature and attempts to find the best estimates of what people seem to be willing to pay for small risk reductions.
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What Value of Statistical Life does the Agency Use?
EPA recommends that the central estimate of $7.4 million ($2006), updated to the base year of the analysis, be used in all benefits analyses that seek to quantify mortality risk reduction benefits regardless of the age, income, or other population characteristics of the affected population. This approach was vetted and endorsed by the Agency when the 2000 Guidelines for Preparing Economic Analyses were drafted. Although $7.4 million ($2006) remains EPA’s default guidance for valuing mortality risk changes, the Agency has considered and presented others.
One of these other values is an estimate of $5.5 million (1999 dollars; $6.6 million in 2006 dollars), that EPA’s Office of Air and Radiation (OAR) began using in 2004 for the analysis of air regulations. After consulting with EPA’s Office of Policy Economics and Innovation (OPEI), the offices jointly agreed that OAR would use the new “interim” value while updates to the mortality risk valuation guidance were completed. The new estimate is derived from the range of values estimated in three more recent meta-analyses of the economics literature. (A “meta-analysis” combines findings from many studies.)
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What studies has EPA reviewed to reach these estimates?
The Agency’s guidance from Guidelines for Preparing Economic Analysesis based on twenty-six studies. Table 1 contains the estimates that currently form the basis of the Agency’s recommended central VSL estimate of $7.4 million ($2006). Most of the studies are labor market studies (i.e., studies that consider the extra compensation workers receive in exchange for taking on additional risk in the workplace) and were published between 1974 and 1991. Although they were the best available data at the time, the Agency is currently considering more recent studies as it evaluates approaches to revise its guidance.
EPA used a range of $1 million to $10 million to arrive at the value of statistical life estimate used by the Office of Air and Radiation. The lower end of the range was based on a meta-analysis of 33 studies by Mrozek and Taylor (2000). The upper end of the ranges was based on a meta-analysis of 46 studies by Viscusi and Aldy (2003). An average of these figures is $5.5 million. This estimate is further supported by a 2006 meta-analysis (of 45 studies) from Kochi, et al. After consulting with the Office of Policy Economics and Innovation (OPEI), it was agreed that this new value would be used by OAR as an interim value while updates to the mortality risk valuation guidance were completed.
Table 1: VALUE OF STATISTICAL LIFE ESTIMATES
(mean values in millions of 2006 dollars) |
| Study | Method | Value of Statistical Life |
| Kneisner and Leeth (1991 - US) | Labor Market | $0.85 |
| Smith and Gilbert (1984) | Labor Market | $0.97 |
| Dillingham (1985) | Labor Market | $1.34 |
| Butler (1983) | Labor Market | $1.58 |
| Miller and Guria (1991) | Contingent Valuation | $1.82 |
| Moore and Viscusi (1988) | Labor Market | $3.64 |
| Viscusi, Magat and Huber (1991) | Contingent Valuation | $4.01 |
| Marin and Psacharopoulos (1982) | Labor Market | $4.13 |
| Gegax et al. (1985) | Contingent Valuation | $4.86 |
| Kneisner and Leeth (1991 - Australia) | Labor Market | $4.86 |
| Gerking, de Haan and Schulze (1988) | Contingent Valuation | $4.98 |
| Cousineau, Lecroix and Girard (1988) | Labor Market | $5.34 |
| Jones-Lee (1989) | Contingent Valuation | $5.59 |
| Dillingham (1985) | Labor Market | $5.71 |
| Viscusi (1978, 1979) | Labor Market | $6.07 |
| R.S. Smith (1976) | Labor Market | $6.80 |
| V.K. Smith (1976) | Labor Market | $6.92 |
| Olson (1981) | Labor Market | $7.65 |
| Viscusi (1981) | Labor Market | $9.60 |
| RS.Smith (1974) | Labor Market | $10.57 |
| Moore and Viscusi (1988) | Labor Market | $10.69 |
| Kneisner and Leeth (1991 - Japan) | Labor Market | $11.18 |
| Herzog and Schlottman (1987) | Labor Market | $13.36 |
| Leigh and Folsom (1984) | Labor Market | $14.21 |
| Leigh (1987) | Labor Market | $15.31 |
| Garen (1988) | Labor Market | $19.80 |
| Derived from U.S. EPA (1997) and Viscusi (1992); Updated to 2006$ with GDP deflator. |
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What is the current process for updating the Agency’s estimates?
EPA is committed to using the best available science in its analyses and is in the process of revisiting its guidance on mortality risk valuation. The Agency has recently engaged the Science Advisory Board Environmental Economics Advisory Committee (SAB-EEAC) on several issues related to mortality risk valuation, including the use of meta-analysis as a means of combining estimates and approaches for assessing mortality benefits when differences in longevity may vary widely (U.S. EPA, 2006). Additionally, the SAB-EEAC has agreed to review EPA’s work as the Agency continues its efforts to update its mortality risk valuation estimates. We expect to present revised estimates for review sometime next year.
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What other values has the Agency used in the past?
Few economic analyses prepared by EPA calculated monetary benefits until the mid-1980s. One of the earliest major EPA regulations that developed more detailed economic estimates of the benefits of proposed regulatory standards was the National Ambient Air Quality Standards for particulate matter (USEPA 1984). This analysis draws on a review of six wage-risk studies published during 1976-1981 with a central estimate of $4.6 million (2001$). Around this same time EPA issued its first economic guidance and reported a range of VSL estimates for use in policy analysis of $0.7 to $12.9 million (2001$) (USEPA 1983). The next major review of mortality risk valuation came in the mid-1990s when EPA reported to Congress on the economic benefits and costs of the Clean Air Act (USEPA 1997). This report based its VSL findings on 26 studies, 21 from the wage-risk literature and five from stated preference studies. This study forms the basis of EPA’s existing mortality risk valuation guidance discussed above.
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What adjustments are made to the VSL estimates at EPA?
With the support of our Science Advisory Board, the Agency makes the following adjustments to primary benefits estimates: (1) adjusting willingness-to-pay estimates to account for higher future income levels, though not for cross-sectional differences in income (i.e., differences in individual income); (2) taking into account the time lag between actions taken today and the benefits that occur in the future through “discounting”; and (3) adjusting for inflation. Any other adjustments, if made, should be relegated to sensitivity analyses.
- Increases in income over time: Studies show that willingness to pay to reduce mortality risk increases as income levels rise. As a result, benefits estimates of reduced mortality risk accruing in future years may be adjusted to reflect anticipated income growth.
- Cessation lags: Many environmental policies are targeted at reducing the risk of effects such as cancer, where there may be an extended period of time between the reduced exposure and the reduction in the risk of death from the disease Footnote 1. This delay between the change in exposure and manifestation of the reduced risk may affect the value of that risk reduction. Most existing VSL estimates are based on risks of relatively immediate fatalities making them an imperfect fit for a benefits analysis of many environmental policies. Economic theory suggests that reducing the risk of a delayed health effect will be valued less than reducing the risk of a more immediate one, when controlling for other factors. A simple ad hoc approach to adjusting existing VSL estimates is to apply the social discount rate over the expected cessation lag. However, defining cessation lags with existing risk assessment methods may be difficult and empirical estimates highly uncertain. Further, the underlying assumptions supporting this procedure may oversimplify how individuals appear to consider delayed health effects.
- Adjustments for inflation: VSL estimates are routinely adjusted for inflation using either the Consumer Price Index or the GDP Deflator. Whichever inflation index is used, it is important that benefits and costs be reported in the same year’s dollars for comparison.
Footnote 1: Although latency is defined here as the time between exposure and fatality from illness, alternative definitions may be used in other contexts. For example, “latency” may refer to the time between exposure and the onset of symptoms. These symptoms may be experienced for an extended period of time before ultimately resulting in fatality.
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References
Kochi, Ikuho; Bryan Hubbell and Randall Kramer. 2006. "An Empirical Bayes Approach to Combining and Comparing Estimates of the Value of a Statistical Life for Environmental Policy Analysis," Environmental and Resource Economics, 34: 385-406.
Mrozek, J. and Laura Taylor. 2002. “What Determines the Value of Life? A Meta Analysis,” Journal of Policy Analysis and Management,21(2), 253-70.
U.S. Environmental Protection Agency. 1983. Guidelines for Performing Regulatory Impact Analyses. Office of Policy Analysis, EPA-230-01-84-003.
U.S. Environmental Protection Agency. 1984. Regulatory Impact Analysis for NAAQS for Particulate Matter. Office of Air and Radiation.
U.S. Environmental Protection Agency. 1997. The Benefits and Costs of the Clean Air Act 1970-1990. Prepared for Congress by Office of Air and Radiation and Office of Policy, Planning and Evaluation. October 1997.
U.S. Environmental Protection Agency. 1999. The Benefits and Costs of the Clean Air Act: 1990-2010. Prepared for Congress by Office of Air and Radiation and Office of Policy, EPA 410-R-99-001, November 1999.
U.S. Environmental Protection Agency. 2000. Guidelines for Preparing Economic Analyses, Office of the Administrator. EPA-240-R-00-003, December 2000.
U.S. Environmental Protection Agency. 2006. “Willingness to Pay for Environmental Health Risk Reductions when there are Varying Degrees of Life Expectancy: A White Paper.”
Viscusi, W. K. 1992. Fatal Tradeoffs: Public and Private Responsibilities for Risk.New York, NY: Oxford University Press.
Viscusi, W. Kip and Aldy, Joseph E. 2003. "The Value of a Statistical Life: A Critical Review of Market Estimates throughout the World," Journal of Risk and Uncertainty,Springer, vol. 27(1), pages 5-76, August.
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Additional sources of information on Mortality Risk Valuation from NCEE
"Economic Valuation of Mortality Risk Reduction: Assessing the State of the Art for Policy Applications," EPA sponsored workshop, November 6-7, 2000, Silver Spring, MD.
"Morbidity and Mortality: How Do We Value the Risk of Illness and Death?," EPA sponsored workshop, April 10-12, 2006, Washington, DC.
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