Question

3. a) suppose that hedonic wage studies indicate a willingness to pay $60 per person for a reduction in the risk of premature death from exposure to asbestos of 1/80,000. if the exposed population is 5 million people, what is the implied value of a statistical life?

b) suppose that an impending environmental regulation to control asbestos is expected to reduce the risk of premature death from 5/100,000 to 2/100,000 per year in that exposed population of 5 million people. your boss asks you to tell her what is the maximum this regulation could cost and still have the benefits be as large as the costs. what is your answer?

Answer 1

The   value   of   the   statistical   life   is   given   as:      

   VSL   =   Change   in   willingness   to   pay   /   Change   in   risk  
  
The   change   in   willingness   to   pay   for   the   risk   reduction   is   ($60   per   person   *    5    million   exposed   people)   =   $300   million.      
  
The   expected   number   of   lives   saved   would   be 62.5 (1/80,000   risk   of   premature   death   * 5,000,000   exposed   population).  
  
VSL   =   ($300,000,000/62.5)   =   $    4.8million

b )

he   value   of   the   statistical   life   is   found   to   be   $4.8    million   per   person   for   the   group   of 5 million   people.   When   the   risk   is   reduced,   the   number   of   lives   saved   can   be   found   as:  

Number   of   lives   saved   =   ( 5/100,000 - 2/100,000) = * 5 million

= 150

Hence,   the   maximum   benefit   received   by   the    150   lives   is   $720    million   ($4.8    million   *   150   lives).   The   maximum   this   regulation   could   cost   and   still   have   the   benefits   at   least   as   large   as   the   costs   is   $720    million