From the WSJ Weekly Review email:
Rail Safety and the Value of a Life
by: Ted Mann
Jun 17, 2013
Click here to view the full article on WSJ.comTOPICS: Opportunity Costs, Regulation
SUMMARY: Transit systems and regulators are debating where to best put limited funds to improve safety: on upgraded signal systems or on structural repairs. "The effort to calculate the value of lifesaving is a growing area of research among regulators and economists alike, says Michael Livermore of the Institute for Policy Integrity at New York University's School of Law. The research enables "finer distinctions" about the cost that society is willing to bear to lower risks, he says.... In the past, to calculate the value of saving a life, the government used the value of the wages a person would have been expected to earn over the remainder of a lifetime, says W. Kip Viscusi, a professor at Vanderbilt University who consulted with the Reagan administration to overhaul life valuations in the early 1980s. At Mr. Viscusi's urging, the federal government adopted a measurement known as the "value of statistical life," or VSL-roughly speaking, the amount of money Americans find reasonable to spend for a given reduction in the risk of death. The switch to VSL raised the dollar value on preserving a human life. Among other things, that made costlier safety regulations easier to justify on economic grounds.... To calculate the value of life for a given government regulation, agencies use wage, consumer-purchase and job-safety data to calculate the premium already built into economic data to account for relative riskiness. So economists deduce from people's willingness to pay for safety features-say, air bags-how much they value lowering the risk of death."
CLASSROOM APPLICATION: Students can discuss the determination of the total expenditures, and allocation of the money, to improve (rail) safety. The allocation of funds between, for example, upgraded signal systems and structural repairs depends on the marginal changes in the value of a statistical life associated with each of the improvements. The total expenditures on improvements in rail safety depends also on opportunity cost of the funds used.
QUESTIONS:
1. (Introductory) The Southeastern Pennsylvania Transportation Authority (SEPTA) identified a tradeoff in its expenditures to improve rail safety. What is the tradeoff?
2. (Advanced) Suppose SEPTA allocates a fixed amount of funds to safety improvements. In allocating these funds between signal improvements and rail maintenance, SEPTA's goal is to minimize the expected value of lives lost from train accidents. In optimally allocating the funds, does SEPTA equate the decrease in the expected value of lives lost associated with signal improvements to the decrease in the expected value of lives lost associated with rail maintenance?
3. (Advanced) What is the value of a statistical life? Why is this criterion used in evaluating safety programs better than the value of the wages a person would have been expected to earn over the remainder of a lifetime?
4. (Introductory) Why was the federal government quick to adopt the value of a statistical life as a criterion to evaluate the benefits of safety regulations?Reviewed By: James Dearden, Lehigh University
