Environmental Economics

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.com

TOPICS: 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