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Chapter 15. Plug Values. Costs and Benefits Requiring Valuation. Costs and Benefits Requiring Valuation. Value of Life. Eestimated either by:
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Chapter 15 Plug Values
Value of Life Eestimated either by: • Indirectly estimating the “price” people are willing to pay to take (or accept) certain risks by observing behaviors in markets for goods that embody risks. The most common and widely accepted method for estimating the value of life is to examine wage premia for risky jobs. • Directly elicit willingness-to-pay or accept valuation amounts with survey questions.
Miller Value of Life Estimates 29 studies considered (originally estimated in 1985 dollars). They estimate value of life in four ways: • Wage premia for risky jobs. • Consumers’ WTP for a variety of safety features, such as safer cars, smoke detectors and life insurance. • Observation of individual behavior on such decisions as the use of pedestrian tunnels, seatbelts or speed choice. • Contingent Valuation (CV) methods to survey people about their willingness to invest in ways to increase safety and health. The mean value of life = $3.02M (1999 U.S.$). with a standard deviation of 0.77. The evidence also suggested that individuals value life similarly whether the risk is voluntary or involuntary or whether the death is painful and slow or quick.
Fisher, Chestnut, and Violette Survey of Value of Life Estimates 21 studies (originally estimated in 1986 dollars). 1) Early low-range wage-risk estimates. • Early high-range wage-risk estimates. • New wage-risk estimates. • New contingent valuation studies. • Consumer market studies. They conclude that the most defensible estimates suggest the reasonable range for the value per-statistical-life is $2.43M to $12.92M (1999 U.S.$), but they place more confidence in the lower end of the range.
Viscusi Survey of Value of Life Estimates 3 sets of studies (originally reported in 1990 dollars: • 21 wage premia for risky jobs studies. The majority of these studies find value of life estimates in the $3.82M to $8.92M range (in 1999 U.S.$). • 7 other revealed preference approach studies. These studies provide widely varying estimates between $0.09M and $5.10M (in 1999 U.S.$). • 6 contingent valuation surveys. These also provide a wide range of estimates – from $0.13M to $19.1M (in 1999 U.S.$). A plausible range for the value of a statistical life is between $2.5M and $4.0M in 1999 U.S.$.
Transport Research Laboratory Estimate of the Cost of Serious Road Injuries The U.K. Dept. of Transport drew two random samples of households and adopted two different valuation methods: • CV method: respondents were asked their WTP for a hypothetical safety feature to reduce risk a specific amount and had to be purchased annually. • Standard gamble (SG) method (see chapter 17): respondents were asked to assume they suffered a road injury. The SG method finds the point at which a person is indifferent between the “standard” treatment and an alternative treatment that would return them to normal health (if successful) or a worse condition if unsuccessful. CV produced an estimate 1.5 to 10.5 times the standard gamble (SG) method. SG method is superior –£74,480 for the cost of a “serious” non-fatal road accident (reported in 1992 British pounds)
Summary on Injury Costs Viscusi’s lower bound estimate represents the average of less serious injuries and his upper bound estimate represents the average of more serious injuries. The Rice-MacKenzie estimates are least useful for fatal injuries, as monetary costs are only a fraction of the social cost.
Cost of Crime Two steps are necessary: • Estimate the reduction in crime resulting from the project = (number of crimes avoided (Nit)). • Estimate or plug-in the value of each crime of each type that is avoided (Ci). Net benefit of avoided crime = NPV Nit x Ci - Cost
Estimates of the cost of crimes • Justice system costs – based on the probability of passing through various stages of the system: custody, arraignment, trial, jail, etc. • Personal injury costs • Direct costs: medical, mental health, emergency response service, and insurance administration. • Opportunity cost of forgone productivity (wages, benefits, housework, etc.). • Pain and suffering cost. • Stolen property costs – • If thieves have standing, but realize only 35% of the value of stolen goods; 35% = transfer and 65% social cost. • If not, 100% social cost
Value of Time Time spent on any activity that individuals would pay to avoid is a cost. In CBA the most important time cost is travel time. This travel time cost is called the “Value of Travel Time Savings” (VTTS). VTTS is usually expressed as a percentage of the after-tax wage-rate.
Value of Recreation Benefits Walsh-Dunn-McKean (1990): 93 recreational studies reviewed by Sorg and Loomis in 1984, additional subsequent studies, for a total of 287 studies. They do the following: • Calculate dollar values per “activity-day” for various recreational activities. • Make adjustments to the studies to standardize the results (approved by expert panel). This includes: • Converting value-per-trip estimates to value-per-activity-day estimates. • Adding an upward adjustment for omitted time travel costs. • Adding a downward adjustment to some values to recognize differing demand inelasticities given the availability or non-availability of substitutes. • Including values of out-of-state visitors when these had not been included. • Adding an upward adjustment to contingent valuation values that had not excluded protest bids.
Cost of Noise Noise is measured in NEFs: • 15-25 – ambient noise. • 25-40 – “some” to “too much.” • 40+ -- “considerable annoyance.”
Cost of Air Pollution • Typically, air pollution costs include health costs (premature death and morbidity) and non-health costs (deforestation, retarded plant growth, reduced agriculture output, coastal erosion, property losses, etc.). The two most common methods are: • Costs are measured by dose response functions that relate a unit increase in pollutant to various health effects. These effects are then weighted by dollar valuations based on WTP estimates. • The hedonic method measures the impact of air pollution on property values
Smith and Huang Meta-analysis Effect of 1 unit change in suspended particulates on the asset value of a typical house (median of $33/microgram/cubic meter). They conclude the dose response method results in much higher cost estimates than the hedonic property approach.
Small and Kazimi Estimates of the Health Care Costs of Pollutants from Vehicles Health costs resulting from motor vehicle pollutants, based on dose response functions – estimated in cost-per-vehicle-mile units. The results imply SOx and PM10 are much more costly than VOC or NOx. -- most costs come from premature mortality rather than from morbidity.
Transferring and Adjusting Plug-in Values • Time (nominal price adjustment) • Income and Socioeconomic Factors • Physical Characteristics • Project Differences • Technology, population changes, etc.
price indexcurrent year Figurecurrent $= price indexearlier year Converting Earlier Figures to Current Dollars • In order to make comparisons across time periods, we must use current dollars. • This can be done by “inflating” the earlier data for the increase in the price level. • The formula for converting the figures for the earlier year into current dollars is: Figureearlier $ * • If prices have risen, this will “inflate” the data for earlier years and bring it into line with the current purchasing power of the dollar.
