Chapter 17 - The Value of Statistical Life

Summary

Introduction

Economic development can have significant environmental impacts. This is true of projects in all major such as power and energy, industry, transportation, and sanitation and sewage. Exposure to environmental contaminants may cause risks to human life and health. To regulate these risks, governments undertake a wide variety of environmental policy projects that involve costs. Since resources are scarce, it is essential to pursue only those proposals that have equal benefits relative to those proposing alternative uses of these resources. A necessary condition for a project to pass the test of economic efficiency is that its costs do not exceed its benefits.

In such a benefit-cost analysis, all relevant benefits must properly be assessed and discounted, taking into account the time of their occurrence. Improvements to human health resulting from better environment standards is a key component of benefits that provides justification for many environmental policies. The health benefits of environmental policies include reductions of accidents and the incidence of environment-related diseases.

The evaluation of such benefits is a straightforward extension of the public finance principles of valuation, in which the appropriate estimation is society's Willingness To Pay (WTP) for environmental risk reduction2. Programmes for environmental safety reduce the risk to death/health. Given the public nature of reductions in environmental risk, a programme contributing to a small reduction in risk could contribute large health benefits to the society. The literature shows that these benefits have to be estimated as the sum of the WTP for reduced risk to all affected individuals.