The price of life. Why not everything can not be bought, but should be measured in money

21-10-2017

Source: epravda.com.ua.

In many Western countries, the issue of monetary measurement of non-material values is the day-to-day work of government bodies. In Ukraine, it’s just the beginning.

Life – 11.8 million hryvnas, escape from disability – 3.5 million hryvnas, prevention of rape in the prison – 208 thousand hryvnas, prevention of terrorist acts on a plane – 1 billion hryvnas.

These prices are neither a price list of a fraud-healer, reflections on the future nor a work of fiction.

This is an indicative example of a price tag, which should be used by every government body in daily activities.

Imagine that some type of production on average causes death of 20 people each year. Measures that will help avoid these deaths will cost the state, enterprises and consumers 100 million hryvnas per year. Should the state make such measures mandatory? Are 20 lives worth 100 million hryvnas? And what if it is 2 billion hryvnas?

Another example is the financing of construction of a cycle path, which will be used, for example, by one hundred people every day. Does a gain in health of this amount of people recompense the investment of 50 million hryvnas? And what if it is 100 million hryvnas?

We will get well-reasoned answers only when we can determine the price of everything that is usually considered to be non-material: life, health, diseases, disability, honor and dignity, air, forest or river purity. Without such a price tag, all management decisions will be taken by intuition.

In many Western countries, the issue of monetary measurement of non-material values is the day-to-day work of government bodies. For the implementation of state regulation, the price of human life in the US is $9 million, in New Zealand – $4.2 million.

The state bodies do not pick this price at random, it is based on how much people themselves are willing to pay for reducing the risk of dying.

For example, if you are ready to pay no more than Y hryvnas for a bicycle helmet, which, conditionally, will save you from the risk of dying in one case out of million, then you estimate the cost of your life in the amount of Y to multiply by 1 million.

You can also calculate the difference in wages of employees having a certain production risk of death, for example, one to 10 thousand, and those employees who do not have such a risk. If their wage is more than $600, then one life will cost $6 million: 600 multiplied by 10 thousand.

The cost of life sometimes includes the cost of damage to health or disability, when, for example, losing a leg will be equated to 0.3 VSL – the indicator of the “value of statistical life”.

Of course, very few people will agree to die for a certain amount of money. In fact, VSL is the statistical cost of mortal risk, and this risk should be insignificant. In other circumstances, this model can not work.

Price of health and environment

Measurement of the price of other values is even a more complicated thing, but it still can be done. You can apply a model based on measuring the difference between the value of different products, for example, the difference in prices of buildings in clean and polluted areas.

You can try to calculate travel expenses: we often spend money on a trip to a holiday resort with the better environmental conditions. The cost of such travels is a monetary value of the purity of environment.

In addition, we spend on preventing the negative consequences: buy filters for water, boil water, pay for preventive medical measures. These expenses also allow to determine the value of certain benefits. It’s even easier to estimate the cost of a disease: it’s the cost of treatment together with time and incomes lost.

Sometimes, for the purpose of estimating the value of benefits, it is calculated how much money are needed to recover them in the case of elimination or creation of an adequate analogy.

The use of such calculations in the United States made it possible to estimate that spending $8.2 million to introduce new rules in prisons would be reasonable if this allowed to reduce the number of rapes in prisons by 55 cases per year.

Some new rules for checking air cargo with a cost of $1.9 billion and $203 million additionally for freight carriages are reasonable, if they allow preventing one terrorist attack per 2.6 years.

Ukrainian realities

In Ukraine, the basic mechanisms for calculating costs and benefits are already in use. When developing a draft regulatory act, each executive body prepares the regulatory impact analysis that should include a description of costs and benefits. However, there is still no scale that would allow to compare non-cash benefits and cash costs.

There are only some acts with hints for monetary valuation of non-material values.

For example, Article 187 of the Criminal Code equates serious bodily injuries with damage in the amount of 200 thousand hryvnas, Article 189 – the same injuries with 480 thousand hryvnas, and Article 194 equates the same 480 thousand hryvnas with the death of people. Why these assessments are so different within the single law is anybody’s guess.

While there are no domestic researches, we can use the foreign ones. One of this year’s foreign analytical materials states that the price of Ukrainian statistical life should be about $454 thousand. What conclusions can be drawn if we take this figure as a basis?

For example, in 2016, as a result of car accidents, 3,410 people died. This means that potential government spending on a successful road safety program can be justified at 1.5 billion annually. If you add a number of non-fatal injuries, this amount may increase at least twice.

The introduction of an effective assessment system will make possible the existence of objective competition between individual reform initiatives. The resources of the state are limited, there are only funds enough for individual projects, therefore they should choose only those initiatives, which will bring the greatest amount of excess of benefits over costs.

This will allow to move away from the practice of choosing first-priority measures by policy makers at the intuitive level or on the basis of reputational or rating consequences.

Not by money alone

Do not you like that money will be the only measure of everything? You are not alone. Many analysts doubt that the monetary equivalent is the most optimal way of comparing the results of state influence.

Their doubts are based on the ability of people to adapt quickly, so increasing or decreasing revenues affects the sense of happiness only for a short period of time.

The indicators of subjective well-being of the people who won the lottery, and indicators of the population of countries, which GDP per capita has grown for several successive years, determined the short-term nature of this effect.

In addition, money is a status. Increasing the status of one person leads to a relative decrease in the status of another person. Therefore, in the case of one person’s enrichment, the overall level of social well-being may remain the same.

However, such criticism has not yet produced any decent competitor of money as a universal equivalent. Because of this, even romantics in state regulation still have to use the pragmatic monetary assessment.

Of course, even the most talented economists will not be able to calculate the value of all the benefits. Sometimes it is difficult to do without alternative methods of calculation: to choose the minimum and maximum limits of the value of the benefit, to calculate quantitative indicators instead of the monetary ones, for example, the number of saved animals instead of their value.

In any case, monetary and quantitative approaches will allow us to move from demagoguery to careful priority ranking and increasing the effectiveness of the state.

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