Running Head: The Value of Human Life 1. The Value of Human Life William Dare The University of Akron

Transcription

1 Running Head: The Value of Human Life 1 The Value of Human Life William Dare The University of Akron

2 Running Head: The Value of Human Life 2 Outline I. Introduction II. Literature Review Economic Value of Life Case of Altruism Demand for Safety Demand for Longetivity III. Model IV. Data V. Data Analysis VI. Conclusion VII. References

3 Running Head: The Value of Human Life 3 Introduction When a government project includes the use of human capital, it can be challenging to determine the costs and benefits associated with the project. It would involve having to put a dollar value in the benefit of having less injuries and sickness and a lower death rate. One way to determine these values is to discount potential future earnings. In order to do this, an estimate of the lives that could be saved and the ages of these people who could be saved. Another argument in valuing life is seeing that there is no value in saving lives and that saving lives is a public good. In the literature review, it will discuss a few arguments for how agencies determine the value of human life. It also goes into detail how the value of human life is attributed to three different aspects, which are altruism, demand for safety, and demand for longevity. Literature Review The Economic Value of Life: Linking Theory to Practice When determining the value of life, there are three approaches that many government programs use when using this value in cost-benefit analysis. The first idea is the human capital method (Landefeld & Seskin, 1982, p. 555). When using this method, one tries to find the real value of production or earnings from labor that a person can contribute to in the future and the consumption that would be lost when a person dies. In this way of valuing life, illness and money accrued through income security programs are not included. The problem with using this method is choosing which rate the future values are discounted at, because at a higher rate there will be less value to life, and vice versa for a low rate (Landefeld & Seskin, 1982, p 556). The second idea is using willingness to pay, which is what a person is willing to put in for the decrease of death in this case. There are two ways people tried to implement this idea,

4 Running Head: The Value of Human Life 4 and that was through surveys and through approximations on revealed preferences (Landefeld & Seskin, 1982, p. 557). The problem with surveying a large group of people is the simple fact that they can say one thing and then change their mind after they have taken the survey. Also having to approximate or value a life to a person can be a difficult thing to answer in a logical sense (Landefeld & Seskin, 1982, p.557). When approximating a value through preferences, one has to take into account the compensation that a person would receive from taking an undesirable or dangerous job through labor and consumption. There are a handful of problems with this approach as well. First, if the is not enough information about the dangers of a job and there are flaws in the labor market, then options can t be determined through wage premiums. Next, when a person is more willing to take a dangerous job, the willingness to pay will be undervalued compared to the actual willingness to pay. Another thing is the chances of injury may blend in with the data for chances of death which will skew the willingness to pay even more. At last, there could be unforeseen biases due to certain restrictions in collecting data (Landefeld & Seskin, 1982, p. 558). The last way to figure out a value to human life is a hybrid of the previous two ideas (Landefeld & Seskin, 1982, p.561). For this method there are three important inputs to consider, which are income, rate of discount, and risk aversion. In contrast to the regular human capital approach, the human capital and willingness to pay hybrid accounts for all sources of income. The only problem with this is that not all types of income, for example Social Security pensions, are available to every age, so individual income is used instead (Landefeld & Seskin, 1982, p. 561). Next, a rate of discount needs to be implemented for the amount of currency in the future lost when a person dies. So in turn, this rate is the time and effort spent to invest in decreasing dangerous activities (Landefeld & Seskin, 1982, p ). Finally, the last aspect taken into

5 Running Head: The Value of Human Life 5 account is avoiding risks. The fact that insurance companies exist is the reason we can measure this in a numerical fashion. The risk premium insurance companies use is the ratio of premium fees to losses, and this in turn is the input needed for valuing life (Landefeld & Seskin, 1982, p. 562). The Value of Human Life: A Case for Altruism There is a demand for government programs dedicated to saving lives, but there is no way to stop the inevitable, which is this case is death. To figure out the budget for a government program dedicated to saving lives, agencies often use a value for a statistical life, which can be different depending on the agency. Agencies have to use cost-benefit analysis in order to place a value on a statistical life, and that value is the willingness to pay for a program that deters death (Brady, 2008). There are two assumptions for the argument against altruism, which is the selfless concern for the well-being of others. The first is that nobody is willing to pay for the increased security of others, which includes relatives and friends, and the second is that altruism should not even be a factor to begin with (Brady, 2008). Valuing a life using willingness to pay can have drawbacks because there are lives that matter more to one person than those lives would matter to another. With that regard there is no way to put a definite dollar value on bringing a person back to life because it would have to be the same amount for all people. Another way to look at it is calculating how small-scale variability in the risk of death performing riskier activities, but the problem with this is that the change in risk can t be the same for more or less dangerous actions (Brady, 2008). To put a dollar value to a statistical life, the life would have to show no bias towards another person or the study. To be able to approximate the benefits of a lower death toll, there has to be a set willingness to pay to lower the costs of death itself. There are three ideas that are related to

6 Running Head: The Value of Human Life 6 valuing a life. The first is that there is a positive correlation with income and willingness to pay. The second is that since willingness to pay is dependent on the chances of dying, then value of a statistical life is based on the core levels of risky actions. The last is that a person s individual well-being is based only on the amount of income they are receiving (Brady, 2008). In the question of whether altruism exists or not, there are many instances to show that altruism indeed does exist. There was an instance where coal miners were trapped and people tried to save them in the accident, some adults will choose a lower salary in order to gain more benefits that carry over to children, and many people give their blood to other anonymous people in the U.S (Brady, 2008). In a practical sense, the opposite is true because a person s willingness to pay for the well-being of an anonymous person is less that the willingness to pay for the individual well-being. When researchers questioned a group of people whether they wanted to be vaccinated from the flu, which is satisfying the well-being of the individual, or a program that lowers the public s chance of getting the flu, people were opting to spend a greater amount of money on the public program. So the assumption that a person is more willing to pay for his or her own well-being over the well-being of others is not true (Brady, 2008). The Value of Human Life in the Demand for Safety One of the main factors in the demand for safety is the death of a person due to unforeseen circumstances. For agencies to determine the costs and benefits of a project for better safety, they have to use the value of life, and they base that value on the average value of life and externalities with these lives (Conley, 1976, p. 45). To determine the utility for better lifetime safety, a single-period utility function of life must be multiplied with a discounted utility and the likelihood of dying. This function is based off of actions in one period throughout the lifetime period, and if the action requires the spending on money through one s income, then it is

7 Running Head: The Value of Human Life 7 considered consumption. For a single-period utility, one s action is assumed to not affect another person s own satisfaction (Conley, 1976, p. 46). The likelihood of death is also at its peak in the period between the first year of life and the highest amount of life possible where death actually occurs. There is only one financial restriction to this function, and that is real consumption has to be the same value as real labor income over a lifetime period (Conley, 1976, p. 46). The value of preserving lives through safety is the sum of other s concern for preserving more lives and the value of life itself (Conley, 1976, p. 49). The value of preserving lives and the value of life are going to be almost identical until a person is close to retiring. It is also true that over a lifetime period, the value of preserving lives is going to be of higher value than real labor income as well as real consumption (Conley, 1976, p. 51). The value of another s concern for preserving more lives is the difference of the likelihood of death times the utility for life minus the chances for survival times the utility of death. If the difference between the utility of living and the utility of death is small, then a person will not bother investing in more safety measures (Conley, 1976, p. 51). A person might also want to leave something behind for another generation of family. There are two ideas involving this idea, the first is that if a person is giving some of their consumption to other people, then the individual consumption is going to drop as well as the value of life. The second idea is that a person s well-being throughout life will be better if he or she gives up some of their earnings whether they live or die (Conley, 1976, p. 52). A Model for the Demand of Longevity and the Value of Life Extension When it comes to the length of time that a person can live for, there has been little thought of it when it compares to a person s quality of life (Ehrlich & Chuma, 1990, p. 761). In varying populations and length of time, there are discrepancies in life expectancy not only due to

8 Running Head: The Value of Human Life 8 different technological and environmental factors, but also due to a demand for life extension. It is not sufficient to measure this demand with the length or standard of life in just one set interval of time, and these two variable are almost positively correlated because with the longer amount of time a person lives, more likely that person will have a better standard of life. Another thing is that life extension can t be measured accurately because death can happen at any time even if the person who died lived a better lifestyle (Ehrlich & Chuma, 1990, p. 762). There are two effects that occur when there is more investment in health capital. The first effect is that the is an increase in the duration of being healthy and a decrease in the duration of being sick, and the second effect is the inevitable outcome of death is pushed back to a later date. These two effects can result in a higher disposable income for a person through education, better salary, and an increase of life. There is a rate of biological decline however for longer periods of time, and this also affects health capital and also has less returns. Each person over their span of life has a unique utility function, so adding in health capital and consumption is essential to figuring out what a person s utility for life would be (Ehrlich & Chuma, 1990, p. 765). Granted, a person s utility function will change over time, so the utility for life would have to be measured from the day of birth to the day of death (Ehrlich & Chuma, 1990, p There is also an ideal level of how much life can be extended, but since life is limited, the value of life extension must also have a maximum limit (Ehrlich & Chuma, 1990, p. 770). There are three ideas that pertain to this: the first is that deteriorating health is higher as a person is older, the second is that a person s lowest health is still a positive number, and the last idea is that there is a restriction to a person s wealth to where the amount of assets with no human traits is greater than the negative value of income from labor. With the last idea, if a person still has

9 Running Head: The Value of Human Life 9 debt after their death, then the amount is carried over constantly (Ehrlich & Chuma, 1990, p. 771). For one to figure out the demand to extend life, they would have to take consumption, health investment and capital, and physical assets (Ehrlich & Chuma, 1990, p.772). A person s wealth over the lifetime is considered a dependent variable. When a person increases their wealth at an earlier age, their health is at a higher standard at the earlier stages of life, but it bottoms out as the age increases (Ehrlich & Chuma, 1990, p. 773). The first increase of wealth also raises the level of consumption and health throughout the period of a person s life. The value of life extension and the value of being healthy are major keys in determining to value of health capital (Ehrlich & Chuma, 1990, p. 774). Life extension is always rising as one gets older, so in turn health capital will always be a positive number (Ehrlich & Chuma, 1990, p. 776). Model To determine the value of human life, I am going to use the modified hybrid willingness to pay and human capital approach. In mathematical terms, it is the sum of the quotient of disposable income in a year, t, divided by (1+r), with r being the rate of discount, and that sum is multiplied by the coefficient of avoiding risk. Data Since the rate of discount varies between individuals differing opportunity costs, I will use three different rates, which are 2%, 5%, and 10% respectively. I will also use the life insurance coefficient of avoiding risk according to J. Steven Landefeld and Eugene P. Seskin which is 1.6. The real personal disposable income per capita is going to be used for the year

10 Running Head: The Value of Human Life according to the Federal Reserve of St. Louis. Since the only year being accounted for is 2015, there is no need for a summation, so the denominator of the equation will be to the first power. There are a couple limitations to some of the variables that need to be addressed. The first is that the risk aversion coefficient is outdated and could be different for the year Another factor is that since the model is designed to take place over a number of years, the values could be slightly different if taken from 2011 to 2015 instead of only Data Analysis (1+.02) 1.6 = $59, (1+.05) 1.6 = $57, (1+.1) 1.6 = $55, According to the data, using the average disposable income and the same coefficient for avoiding various dangers, the more opportunity costs one has for spending in decreasing risk, the less the value of life is going to be for them. Conclusion To conclude this paper, one should know that there are three ways that people try to value a human life, and that is through looking at the human capital through future earnings and consumption, the willingness to pay idea by way of surveying or statistical analysis, or a hybrid between the previous two ideas. In this model, we used the hybrid method to determine the dollar value of life because this way there are not as many drawbacks as the other methods. Also

11 Running Head: The Value of Human Life 11 when a value of human life is found, it can be used to determine whether or not people are willing to pay for other people s well-being, it can determine a demand for safety and it can determine a demand for extending life.

12 Running Head: The Value of Human Life 12 References Brady, K. (2008). The Value of Human Life: A Case for Altruism. Idaho: Natural Resources Journal, 48(541) Retrieved from 8&rfr_id=info%3asid%2fProQ%3aeconlitshell&rft_val_fmt=info%3aofi%2ffmt%3akev %3amtx%3ajournal&rft.genre=article&rft.jtitle=Natural+Resources+Journal&rft.atitle=T he+value+of+human+life%3a+a+case+for+altruism&rft.au=brady%2c+kevin+l&rf t.aulast=brady&rft.aufirst=kevin&rft.date=2008&rft.volume=48&rft.issue=3&rft.spage= 541&rft.isbn=&rft.btitle=&rft.title=Natural+Resources+Journal&rft.issn= &rft_ id=info%3adoi%2f&site=ftf-live In the case for altruism, which is the selfless concern for the livelihood of others, there are two cases against altruism being a factor in determining the statistical value of a human life. The first argument is that a person can t have selfless concern for another person that they do not know of their existence. The second is that altruism in itself should be ignored in determining a dollar value to life. In theory, people do have selfless concern for others that are unknown, donating blood is the example used. However, willingness to pay for public safety should be greater than the willingness to pay for private affairs, which is usually never the case. The conclusion is that altruism is not a neutral variable, and that it cannot be ignored. Altruism in fact should increase the statistical value of human life. Landefeld, J. S., & Seskin, E. P. (1982). The Economic Value of Life: Linking Theory to Practice. Am J Public Health, 72(6). Retrieved from When it comes to evaluating human life, there are three ways to do so. There is the human capital method which requires the knowledge of the future consumption and earnings. There is the willingness to pay method which requires surveying hundreds of people or statistical analysis to find out how much people will want to pay for a decrease in dangerous activity. The last idea is the hybrid of the previous two approaches which only requires the knowledge of the earnings, the rate of discount, and the coefficient for risk aversion. This article is relevant because it specifically lays out three different mathematical formulas to value a human life and the theory and drawbacks of each approach. Conley, B. C. (1976). The Value of Life in the Demand for Safety. The American Economic Review, 66(1). Retrieved from The value of human life is a key component for government projects concerned with increasing the safety of citizens and preserving life. It allows someone to derive a utility function for life itself and the increased safety associated with it. For a value of preserving more lives, one must have the value of a human life and add that to a numerical value of other s concern for increased

13 Running Head: The Value of Human Life 13 safety. This is why the value of life is important because it is used to make a demand curve for a market of safety. Ehrlich, I. & Chuma, H. (1990). A Model of the Demand of Longevity and the Value of Life Extension. Journal of Political Economy, 98(4). Retrieved from This article takes the value of human life and attempts to create a demand for extending life. In order to do so, one has to measure the technological and environmental aspects of increasing the quality of life through more than one period of time. There is also an optimal value for life extension which decreases as a person is older. To measure this, the wealth and the consumption of a person needs to be acquired. Real Disposable Personal Income: Per Capita. (2016). FRED. Retrieved from The data collected from this source was the real disposable personal income per capita attained from the federal reserve of St. Louis, Missouri. The data was used for the model to determine a value to life.