A Valuable Life (to Some Extent)Immoral and Repulsive?An Economist’s ResponseStatistical Value of LifeThe Ford PintoSlide 6Ford Pinto: CostsBenefitsWhat was Ford Thinking?Sound Business Decision?How Valuable is a Life?A Social PerspectiveSocial Value of LifeExampleExample (cont’d)Wage dataStatistical Value of LifeBack to the Ford PintoScarcityOptimal Level of SafetySafety (cont’d)Cotton Dust StandardsImplicationsTrade-Offs?Some Additional ThoughtsSocial PolicyOptimal PolicyA Valuable Life (to Some Extent)Trade-OffsbyHarold WinterImmoral and Repulsive?•Many are uncomfortable with the idea of equating a person's life with a finite dollar amount. •They often believe that a human life can only be infinitely valued.–To object is immoral and repulsive. 2An Economist’s Response•An economist can convince an individual that she does not place an infinite value on her own life. •Why would she take even the slightest risk of losing her infinitely-valued life, especially just to attend a dinner party?–What some economists do explicitly, virtually every individual does implicitly—they place a finite value on human life. 3Statistical Value of Life •Economists routinely use a statistical value of life estimate in policy analysis to measure trade-offs. –This is the value of life in a cost-benefit analysis sense—the dollar cost of improved safety must be compared to the dollar benefit of improved safety. •If the benefit is measured in lives saved, a dollar value of life is important to determine. 4The Ford Pinto•The Ford Pinto case represents a tragic example of the application of value of life estimates in a cost-benefit framework. –On an Indiana highway in 1978, three girls between the ages of sixteen and eighteen were killed while driving a Ford Pinto.–Apparently, had Ford made an $11 modification in the design of the Pinto, the deaths of the girls may have been avoided. 56Ford Pinto: Costs•Ford had undertaken a cost-benefit analysis. –Ford assigned a dollar value to the potential loss of human life in the event of just such an accident. •It was more cost effective for Ford to pay damages to the families of accident victims than it was to make the modification. •Cost: An $11 modification for the total number of Pintos on the road was approximately $138 million.7Benefits•Ford determined how many individuals would probably be killed or injured in a rear-end Pinto collision.–Using average liability amounts from wrongful death and injury litigation, they calculated their legal liability of not using the modification. –Using a liability amount of $200,000 for each person killed, and $67,000 for each person injured, they totaled their overall liability at approximately $50 million. 8What was Ford Thinking?•Thousands of decisions must go into something as complicated as product design for an automobile.–Any single improvement in safety may cost just a few dollars, but if there are hundreds of potential safety modifications to consider, the improvements in safety may cost thousands of dollars. 9Sound Business Decision?•Ford made a sound business decision for its shareholders.•Was it a sound business decision from society's perspective? –Proper cost-benefit analysis doesn't only require using a value of life estimate, it requires using the appropriate one. –But what is meant by appropriate?10How Valuable is a Life?•In a wrongful death case, part of the issue that must be determined by the judge or the jury is how to assign a damage award for the loss of life. –Damages based on contributions.•Benefits that would have been provided for the decedent's beneficiaries had there been no wrongful death. ($) –Damages based on loss to the estate. •Probable earnings of the decedent, less probable personal expenses, had there been no wrongful death.($)11A Social Perspective•From a social perspective, a value of life includes anything that can be considered valuable to the individual. –The goal of estimating the value of life, then, is to try to place a dollar value on both the pecuniary and nonpecuniary aspects of that value. 12Social Value of Life•Individuals routinely take actions that suggest they are either willing to pay to avoid, or must be paid to incur, an increased risk of death. •Suppose you are trying to choose between two job offers. –Both jobs are completely identical to you except in two respects—one job has a slightly higher risk of death than the other job, and the wage rates may differ.13Example•The riskier job pays a wage premium relative to the less risky job. –It may be possible to identify the exact wage premium that makes you completely indifferent between the two jobs. –With that amount, and some idea of the difference in the risk factors of the two jobs, we can estimate a value of life.14Example (cont’d)•Suppose the riskier job has a one in ten thousand (1/10,000) higher death risk than the less risky job. •$500 minimum annual wage premium.•If 10,000 workers each giving an identical answer, we have a total of ($500X10,000), or $5 million.–In a statistical sense, then, we can say that one life is valued at $5 million. 15Wage data•If a $500 annual wage premium is needed to compensate for a 1/10,000 risk premium, the statistical value of life estimate for an average worker is calculated to be $5 million.–The main advantage of using labor market data to estimate a statistical value of life is that we are using data based on observable market behavior. –There have been numerous empirical studies that have attempted to estimate a statistical value of life. 16Statistical Value of Life•The range of estimates is generally between $3 million and $7 million. –This means that the typical wrongful death damage award is significantly below the statistical value of life estimate found in most empirical studies.17Back to the Ford Pinto•The problem with Ford's cost-benefit analysis was not that they were trading lives for dollars. –Ford correctly determined legal liability to be based on the $200,000 wrongful death damage estimate that the courts used. –If the social value of life estimate falls in the lower end of the $3 million to $7 million range, the dollar cost of not adding the safety modification in terms of life lost and injury would be close to $1 billion (not $50 million).–With the larger value of life estimate, the cost-benefit analysis shows that the safety modification would