Wednesday, August 13, 2008

What is human life worth?

Aug 12, 2008

By Euston Quah & Chia Wai Mun
AN AMERICAN'S life has become cheaper. How much cheaper? By about US$1 million (S$1.4 million), according to a US environmental body.

A public outcry erupted when the Associated Press (AP) reported on July 10 that the US Environmental Protection Agency (Usepa) had lowered the value of an American's statistical life from US$7.8 million five years ago to US$6.9 million now.

Not surprisingly, the Usepa did not make the devaluation public. But AP's Seth Borenstein discovered the devaluation after he reviewed US government cost-benefit studies over the past decade. Lowering the value of a life will affect government policies profoundly because the less a life is worth to a state, the less need it will feel for regulations to protect life.

The issue of valuing lives also cropped up in Singapore during the recent debate on organ trading. Which matters more: saving people or sticking to an ethical code? Which should we choose: more dialysis machines or more kidney transplants? Answers to such difficult question come down in the end to the worth we assign lives

The thought of putting a dollar value to a human life may provoke moral outrage but the process is necessary for good public policy. No country has an infinite amount of money and resources to spend on protecting and extending each citizen's life. At some point, choices have to be made in such areas as health care and safety regulation.

Policymakers out to get the biggest bang for their taxpayers' buck must decide how much resources they will allocate to prevent unnecessary deaths rather than, say, improve education or public housing. The value of a statistical life reflects what people are willing to spend to reduce small risks of death. It is a measure used widely to evaluate public policies in medicine, environmental regulation and transportation safety.

Everyone accepts some measure of risks in his or her life. Some of these risks can be avoided by spending money. When a person tries to avoid potentially fatal risks, or accepts compensation to take such risks, he implicitly defines a trade-off between wealth and a lower or higher chance of death.

There are many methods of valuing a life, but most centre on one idea: The value of a statistical life should roughly correspond to the value that people place on their lives in their private decisions.

Suppose workers face a one in 10,000 risk of being killed each year and that they accept this risk in return for an extra $200 in annual wages. The statistical value of life then becomes $2 million (200 x 10,000).

But this number does not imply that people would accept death if paid $2 million or that they would come up with $2 million to prevent a certain death. Rather, it captures the amount which would make people consider a small change in the risk of death.

Government agencies put a value on human life so they can calculate the costs versus the life-saving benefits when drawing up particular regulations. If they set that value too low, regulations to protect life - such as stringent airline safety and tighter pollution restrictions - would start to look like more trouble than they are worth.

The value of a statistical life tends to correspond with per capita income. With a per capita GDP of US$45,845, the US has a statistical life valued at US$3.6 million (the average of 39 studies conducted in the US on the value of a statistical life). Australia, with a per capita GDP of US$36,260, has a statistical life value of only US$2.2 million. Among newly industrialised countries, Taiwan and South Korea have the lowest - US$1 million and US$646,000, respectively. What is Singapore's?

In December last year, we conducted a study to determine the value of a statistical life here. We asked people how much they were willing to pay for a small fall in their chances of dying.

From a sample size of 800 respondents, we conducted personal interviews with residents in seven housing areas - Yishun, Redhill, Tampines, Boon Lay, Bukit Timah, Choa Chu Kang and Sengkang. We estimated the value of a statistical life here to be between S$850,000 (US$606,00) and S$2.05 million.

Being a relatively advanced economy, with per capita purchasing power parity GDP of US$49,714, the value was close to that of South Korea and Taiwan but was surprisingly lower than America's or even Australia's. However, while the figure is lower here than in other advanced economies, the sum of S$850,000 to S$2.05 million is not small when translated into public project evaluations.

Of course, other economists may disagree with the figure we arrived at. But whatever the disagreements, we should try to put a value on life here for it would help us refine public policy in a wide variety of areas.

After the Sept 11 tragedy, the US government issued guidelines for compensating the victims' families, dividing the payouts into economic and non-economic parts. It must have been extraordinarily difficult to stick a monetary figure on the intrinsic value of life in such circumstances. But the US government had to do it because the victims' families demanded some form of compensation for their loss and the public expected it.

Ultimately, the question is not whether we should take on the challenge of ascribing value to life but how we should do it.

Euston Quah is professor of environmental economics and the head of economics at Nanyang Technological University. Chia Wai Mun is an assistant professor at the same university.

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