Kip Viscusi: Pricing Lives for Policies in 2018

ViscusiAfter major catastrophes, there are often tallies of economic damages. The loss of life is often relegated to being the object of thoughts and prayers, but such losses have substantial economic value as well. Take two examples: the collapse of the bridge in Genoa, Italy on August 14, 2018, that killed 43 people; and the tourist Duck boat sinking on July 19, 2018 in Branson, Missouri that killed 17 people. How should we think about the economic value of preventing these deaths?  Court awards after fatalities are often modest, typically focusing on the earnings loss of the deceased. The approach I advocate to value fatality risks in a wide variety of situations is to use the value of a statistical life (VSL). The VSL corresponds to how much society is willing to pay to prevent a small risk of one expected death. In my book, Pricing Lives: Guideposts for a Safer Society, I estimate that the VSL in the U.S. is $10 million.

Turning to these two recent catastrophes, let us calculate the economic value of the loss. The Genoa bridge collapse involved a heavily used motorway bridge, the Morandi Bridge. A 657 foot section of the bridge with dense traffic fell 148 feet. How much would it have been worth to spend in advance of the bridge collapse to prevent it from occurring? Based on my estimates of the VSL for Italy, the economic value of this loss was $243 million, in addition to the property damage and injury costs, bolstering the importance of providing a safer infrastructure. The Duck boat incident involved a capsized tour boat during a major storm while the boat was touring Tale Rock Lake. Preventing the Duck boat disaster would have been worth at least $170 million. With at least 20 additional more people killed in Duck boat accidents since 1999, there are clearly substantial economic benefits to greater safety measures than those that have been in place.

The most frequent use of the VSL in valuing lives for government policy is prospective rather than such retrospective calculations. On August 21, 2018,  the Environmental Protection Agency (EPA) announced a relaxation of air pollution standards that according to EPA estimates would lead to as many as 1,400 health-related deaths per year (NYT, Aug. 21, 2018, “Cost of New E.P.A. Coal Rules: Up to 1,400 More Deaths a Year.”). This startling risk estimate corresponds to an annual economic loss of $14 billion. This mortality cost should loom large in any balancing of benefits and costs of the regulatory relief effort and may well offset the purported economic benefits of deregulation. The EPA news release for the Affordable Clean Energy Rule estimated that this rule, which was targeted at providing relief to limits on coal-fired power plants, would generate $400 million in compliance costs and $400 million in additional emissions reduction benefits. Actual benefits and costs will depend on implementation of the relaxed pollution rules by the states.

While the VSL has been adopted most widely in setting government safety standards, it also provides the appropriate guidepost for setting penalty levels intended to serve a deterrence function, which is the usual province of punitive damages. How much should the courts penalize those responsible for deaths or catastrophic injuries? Jury instructions are not particularly helpful in enabling juries to select a punitive damages award, but the VSL provides precise guidance. The class action suit verdict against Johnson & Johnson in St.Louis, Missouri, on July 12, 2018 awarded damages to 22 women claiming injuries related to asbestos in talcum powder. Each woman received $25 million in compensatory damages, for a total of $550 million, and the group received an additional $4.14 billion in punitive damages. This blockbuster award had no sound rationale. If the desire is to properly deter firms from marketing risky products in the future, then the awards linked to the VSL are sufficient. The result would be a payment of $10 million each plus any additional medical expenses. Appropriate penalties on the order of $220 million plus all medical expenses would total far less than the award of $4.69 billion, but would still suffice in giving Johnson & Johnson the right incentives to avoid future risks.

The settlement amount for unwarranted police shootings likewise could be linked to the VSL. If the objective it to send the appropriate financial signals to the police to stop such behavior, settlements equal to the VSL will suffice. Of the 9 publicized police settlements after victim deaths, the median settlement is only $5 million, and only one settlement has been over $10 million. In this instance, using the VSL as the guidepost would put the settlement amounts on sounder footing. At present, all but one of these settlements has fallen short of a more pertinent safety-enhancing level.

What these examples indicate is that the VSL enables us to assess the value of mortality risks in a wide variety of situations. To date, government agencies throughout the world have adopted the VSL in assessing the likely economic benefits of risk and environmental regulations. Greater use of this approach by corporations, government agencies, and the courts would eliminate the systematic underpricing of life that often occurs.

W. Kip Viscusi is the University Distinguished Professor of Law, Economics, and Management at Vanderbilt University. His many books include Economics of Regulation and Antitrust and Fatal Tradeoffs: Public and Private Responsibilities for Risk.