Value of a Life:

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Value of a Life

• Compensation and Regulation of Asbestos and other
  Work Hazards

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• Health and safety issues in the workplace are
  another setting where externalities can arise.
  Firms can invest in safety for their workers or
  they can produce at a lower cost. If they dont
  take the safety precautions that is an
  externality in production. See figure on the next
  slide

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Private vs Social Cost in Workplace Safety
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What does a world with externalities look like?
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• The government might want to do something about
  this externality.
• It has a few options
• It can regulate industries to impose safety
  standards
• It can compensate individuals
• It can do a mixed strategy, i.e., some regulation
  and some compensation for persons effected by low
  safety standards

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• If a government chooses the compensation option
  then it needs to decide how to value a life or an
  injury.
• Unfortunately, these prices or values that are
  not directly observable in the market.
• Generally these are shadow values, although they
  are not observable they can be inferred from
  prices that are observable.

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• Some examples of government programs that provide
  compensation
• Social insurance programs that compensate workers
  for occupational accidents
• Social insurance programs that compensate the
  families of those killed while working
• Setting up special funds to compensate those
  exposed to hazardous substances while working,
  where symptoms of exposure are not seen until
  well into the future e.g., Black Lung for coal
  miners, Asbestosis and Mesothelioma for workers
  exposed to asbestosis fibers

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• The primary focus of this lecture will be
  asbestos.
• What is Asbestos?
• Asbestos is a mineral that has been found to have
  very good properties as an insulator and
  resistance to fire.
• However, health risks have been also found for
  those exposed to asbestos fibres, which are very
  dangerous

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Asbestosis Fibres on a Rock
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Asbestosis Insulation on pipes
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• Health Risks of Asbestos fibres
• Abestosis fibres can be inhaled and create scar
  tissue in the lungs. The scar tissue makes it
  more difficult to breathe and eventually you can
  breathe. This disease is called Asbestosis
• Exposure to asbestosis fibres can also cause
  Mesothlelioma, a cancer of membrane around the
  lungs. There is no cure, it is 100 fatal.

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• A cost-benefit framework can be used to provide
  insights into these issues.
• Whether to regulate the use of asbestos and if
  so, how strict are the standard
• How to compensate persons for exposure to
  asbestos
• A few different approaches can be taken well
  consider these alternative options as well as
  their advantages and disadvantages

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Computing Benefits/Payments for Occupational
Deaths

• There are a few different approaches that can be
  used to compute payments or compensation for an
  occupational (or other reason) death
• Legal approach
• Used in medical malpractice or wrongful death
  litigation
• Traditionally, an accounting exercise where a
  tribunal is required to determine liability and
  then determine each separate element of loss and
  assign a monetary value to each element

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• Can sometimes determine two components of loss
• Economic vs Non-Economic loss
• Payments are made in a lumps
• Economic losses are determined by figuring lost
  earnings capacity of an individual, which
  requires determining how much a person wouldve
  earned and also how long they wouldve worked

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• How much?
• If a person has an established job, relatively
  easy to determine However, it is much more
  complicated if a person is still getting their
  education or there is a lot of uncertainty in
  their earnings (e.g., a self-employed person or
  someone who has a large variable component to
  their earnings, i.e., bonuses, profit sharing or
  commissions

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• How Long?
• How long would the worker work? When would they
  retire? Normal retirement age (65) versus early
  retirement age (60) or average retirement age
  (62.5)
• Since these computations are present values,
  there is also an issue about what the discount
  rate should be
• In Ontario, they legislate the discount rate.

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• Non-Economic Losses
• Involves compensation for loss in quality of life
  or pain and suffering
• Generally, courts in Canada award smaller awards
  for non-economic losses than U.S. courts
• 2. Workers Compensation
• A no-fault social insurance system for
  occupational injuries and diseases, which means
  you dont have to show negligence pays fixed
  sums

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• Here are some examples for Ontario

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Lump Sum Awards, 2013
Age Compensation
Less than 20 114,805.68
25 105,238.53
30 95,671.39
35 86,104.25
40 76,537.11
45 66,969.97
50 57,402.82
55 47,835.68
60 or older 38,268.54
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• Monthly awards, minimum compensation annual for
  spouse and child is 21,730.28, maximum is
  83,200.
• Burial amounts, pay for the funeral costs
  minimum payment is 2870, no maximum, but will
  only pay for reasonable expenses.
• Some differences across provinces in terms of the
  amounts they are willing to pay and how large the
  maximums might be (e.g., maximum payments in
  Newfoundland and Prince Edward are smaller than
  those in Ontario)

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• 3. Statistical Value of a Life
• This is the economic appraoch
• Rests on the following assumption
• If you work a more dangerous job, then you will
  want a higher wage to compensate you for the
  dangers of worker (called a compensating
  differential), as risk increases so do wages
• If you assume that wages fully compensate workers
  for the hazards of working then it is possible to
  use the differences in wages between a safe job
  and a risky job

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• A shadow price for the value of a life, can be
  computed using the differences between the safe
  and risky job.
• Example
• Job 1, the safe job, risk level 0.001
• Job 2, the risky job, risk level 0.002
• Job 1 and 2 are same in every other respect
  except that the risky job pays 50/week than the
  safe job

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• This implies that a worker in the risky job is
  willing to accept an extra fatality risk of 0.001
  for an extra 2,600 per year (52 weeks x 50 a
  week)
• Can extrapolate this figure

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Extra fatality risk Extra salary required
0.001 2600 (1 x 2600)
0.002 5200 (2 x 2600)
0.003 7800 (3x 2600)

1.00 2,600,00 (1000x 2600)
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• Simple calculation
• Value of Life Requirement in Extra Salary/Extra
  Fatality Risk
• Value of Life2600/0.0012,600,000
• The statistical value of a life is a shadow value
• Generally, economists estimate the value of a
  life using regressions of wages on the
  probability of death as well as explanatory
  variables for worker and job characteristics

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• Estimates from the literature (in US dollars)
  range from a low end of 600,000 to 16.2
  million most estimates tend to be between 4 and
  7 million with a median of about 4.9 million
• Generally, the more variation you have in the
  measure of risk, the bigger the estimate of the
  statistical value of a life

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• The Statistical Value of a Life tends to be much
  higher than the compensation provided by workers
  compensation insurance that was presented
  earlier.
• Why?

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• Workers compensation is a no fault insurance
  system, so there is no process for determining
  negligence on the part of the worker or employer,
  which means payments are (relatively) immediate.
  This sort of trade-off can explain why benefits
  are much lower than a statistical value of a
  life.

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• The alternative to the no-fault system is a
  system that proves neglience on the part of
  employers (i.e., a tort system) in a court of
  law these sorts of settlements tend to be in
  line with a statistical value of a life. However,
  it very costly and time consuming to go court and
  there is also a chance the person suing their
  employer can end up with nothing. So the tradeoff
  is to get a smaller amount with certainty versus
  a much larger payment with a smaller probability.

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Evaluating Regulations Protecting Workers from
Absestos Exposure

• Abestosis exposure has some very serious health
  risks. Up until the late-1960s was still widely
  used in industrial and residential settings
  despite some knowledge of health risks
• Industrial uses included using in brakes for cars
  and as insulators wrapping steam pipes
• Residential uses included mixing it with plaster
  and wrapping pipes used for heating and hot water

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• In the 1970s governments began to set more
  regulations on the use of asbestosis and the
  exposure limits for workers who handled
  asbestosis.
• Well consider these regulations from a
  cost-benefit framework
• Objective is to pick the optimal exposure level
  given the costs of reducing worker exposure and
  the harm that results from exposing workers to
  asbestosis

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• There are a few ways to measure the harm that
  results from exposure, but both amount to
  willingness-to-pay measures

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• With this measure, qt is the probability of
  surviving from period 1 to period t
• r is the discount rate
• T is the maximum life span
• Ut (xt) is the utility of xt at time t

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• Can simplify this assuming that x and utility are
  constant over time
• This equation implies that any reduction in the
  probability of surviving until year t reduces
  expected utility EU

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• Can use this framework to compare two policies on
  the regulation of workplace risks and hazards.
• The change in regulations should have an effect
  on the survival probability qt so if have two
  policies i and j with survival probabilities
• Policy i implies survival probability qti
• Policy j implies survival probability qtj

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• An alternative approach to valuing deaths is to
  replace the survival probability in equation (1)
  with the probability of dying in year t, where
  the probability of dying is denoted as mt (note
  the qts will be large numbers closer to 1, but
  the mts will be smaller numbers closer to 0)
  this changes equation (2) which is now expressed
  as

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• The mit and mjt represent the probability of
  dying in year under policy i and j
• Equations (2) and (3) are used to compute the
  cost of saving a life these figures can then be
  compared with the value of statistical life which
  measures the benefit of saving a life.
• The principles of cost-benefit analysis tell us
  that a project/policy should proceed if the
  benefits exceed the costs

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Do the Benefits of Absestos Regulation Exceed the
Costs of Regulation?

• Estimates of equation (2) and (3) have been
  undertaken in the empirical literature to
  determine the costs of asbestos regulation.
  Consider the following examples
• Dewees and Daniels (1986) found that reducing
  exposure levels to asbestos by 75 would produce
  an estimate of the (2) or (3) of about 35
  million

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• In the U.S. the Occupational Health and Safety
  Agency (OHSA) implement much more stringent
  asbestos regulation in the 1970s, which were
  estimated to cost about 35.6 million
• In 1986 the OHSA ended up imposing much tougher
  regulations, these regulations were estimated to
  cost 114.8 million

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• If one where to take the 5 million estimate of
  the value of a statistical life, then the
  benefits of a life saved are much less than the
  costs of a life saved moreover, the costs of a
  life saved exceed the benefits of a life saved
  even when the maximum estimate of the value of a
  statistical life (about 16 million) is used.

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• From an economic perspective it appears that the
  regulation is excessive, since the costs far
  exceed the benefits. And the regulations are not
  consistent with other rules/approaches for
  regulation in other branches of the U.S.
  government.
• For example, the U.S. Department of Transportion
  does not pursue safety measures if their cost is
  3 million or more (this assumes that the value
  of a statistical value of a life is 3 million,
  which might be a little low).

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• The end result of the regulation is that asbestos
  is no longer really used since it is too
  expensive to produce anything with it since
  health and safety standards mean that a lot of
  care has to be used when producing anything with
  it. So ended up substituting away from asbestos
  and using other materials.
• If a cost benefit approach was used, instead of
  just picking standards, perhaps there still might
  have been an asbestos industry, although it would
  probably only have been used in a few products.