Estimating Mortality Risk Reduction and Economic Benefits from Controlling Ozone Air Pollution (2008) / Chapter Skim
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5 Economic Valuation of Reduction in Mortality Risk Associated with Ambient Ozone
5 Economic Valuation of Reduction in Mortality Risk Associated with Ambient Ozone
Pages 128-159
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From page 128... ...
One important and controversial issue related to valuation is whether the effects of reducing mortality risk should be measured in terms of lives saved (deaths postponed) or years of life extension (increased remaining life expectancy)
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From page 129... ...
As noted in Chapter 4, another related question is whether those most affected by ozone are already in such poor health that their remaining life expectancy is low despite a reduction in ozone exposure. If decreases in short-term ozone concentrations merely decrease "harvesting" those who are already frail and near death, the economic benefit of reducing their exposure to air pollution may be relatively small and should be reflected in a much lower VSL or VSLY than that estimated for relatively healthy people.
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From page 130... ...
. Some authors have argued that the appropriate measure of WTP for risk reduction is not the values expressed by the people actually affected by the policy, but the values of people who do not know their actual position in society (age, income, wealth, health status, etc.)
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From page 131... ...
The standard approach for cost-benefit analyses is thus to measure the benefits of a mortality-risk reduction on the basis of the value to each individual of his or her own reduction in risk and then to sum these values across all affected individuals. An important conceptual question is whether, if individuals are altruistic toward others, especially family and friends, altruistic feelings should be included in the valuation of reductions in mortality risk by adding WTP values that people have for others' risk reductions.
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From page 132... ...
The subjective rate of time preference is the rate at which a person discounts future utility relative to current utility. Empirical evidence and common sense suggest that the value to a person today of future consumption is something less then the value of current consumption, and the difference between the two is the discount factor (which implies a subjective rate of time preference)
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From page 133... ...
Thus, the decrease in remaining life expectancy with increasing age motivates the hypothesis that WTP for mortality-risk reduction should fall with age. However, if there are constraints on borrowing against future income, per-period consumption is likely to rise in the earlier years of the life cycle.
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From page 134... ...
Since VSL is the ratio of the discounted expected utility of consumption to the expected marginal utility of consumption, and since both terms move in the same direction, the effect on the ratio is indeterminate. Thus, the combined effect of lower likelihood of survival and shorter remaining life expectancy on WTP to reduce mortality risk is ambiguous.
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From page 135... ...
There are two general economic approaches to measuring WTP for nonmarket goods, such as changes in mortality risks. The first is to analyze actual situations in which WTP for changes in mortality risks may be indirectly revealed; this category of estimation approaches, which is based on behavior, is called revealed preference.
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From page 136... ...
The estimation method is important because it has been a primary source of the estimates that EPA has used for monetary valuation of mortality-risk reductions in environmental-policy analyses. The basic premise of wage-risk studies is that workers reveal the tradeoffs that they are willing to make between risk and income in the choices of jobs that they accept.
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From page 137... ...
In a direct statedpreference approach, subjects are asked to estimate what they would be willing to pay to change their mortality risk by a specific amount. Other statedpreference approaches ask respondents to choose among alternative scenarios or policies that have varied costs and amounts of risk reduction and thus reveal but not explicitly state their WTP values.
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From page 138... ...
5 in 10,000 translates into a few weeks of additional life expectancy, their WTP might be different. The WTP for any risk reduction can be summarized as an average VSL or an average VSLY, given estimates of the rate of time preference and remaining life expectancy for the population from which the WTP values were derived.
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From page 139... ...
or different risk contexts. Furthermore, the time-series epidemiological literature, which was all that was originally available for quantifying mortality risk changes from air pollution changes, could not support a life-years approach, as detailed in Chapter 4.
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From page 140... ...
, EPA conducted a sensitivity analysis by using a constant VSLY and an estimate of life years saved by reductions in mortality related to particulate matter (PM) , assuming average remaining life expectancy for each age cohort and using agespecific risk estimates.
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From page 141... ...
If adjustments are made, the SAB panel recommended they be based on the results of individual studies rather than the aggregate results of meta-analyses. The SAB concluded that the relationship between VSL and remaining life expectancy requires empirical study because economic theory places no restriction on whether VSL increases, decreases, or remains constant as life expectancy decreases.
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From page 142... ...
. VSL estimates drawn from wagerisk studies, the most common source of published VSL estimates, are for working-age adults who are well enough to be employed.
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From page 143... ...
In any event, EPA, with some recent exceptions, has chosen to use a VSL metric that is not varied for differences in life expectancy rather than a VSLY metric to adjust for differences in life expectancy.
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From page 144... ...
All three meta-analyses report mean VSL estimates. One of the challenges that complicated all three meta-analyses was that many studies report more than one VSL estimate based on different model specifications for analyzing the data.
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From page 145... ...
studies and the most comparable analytic approaches, the range of mean VSL estimates narrows considerably. All three meta-analyses report mean results from wage-risk studies in the United States, excluding studies that used the inappropriate Society of Actuaries data7 and studies that covered only high-risk occupations (such as police work)
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From page 146... ...
Some of the studies reported more than one VSL estimate based on different WTP questions or different model specifications. In those cases, an average result was calculated for each of the five studies.
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From page 147... ...
That is true even if the relative risks posed by ozone are the same for all ages, because the baseline risk of death from respiratory or cardiovascular illness is higher for those over 65 y old. This section summarizes the empirical evidence on how WTP for mortality-risk reduction varies with age, covering both stated and revealed preference studies.
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From page 148... ...
8 Of the 26 most reliable studies that tested for age effects, 14 reported evidence of a senior discount effect and 12 found either no effect or a senior premium. In those finding a discount, the size of the effect is difficult to present consistently because studies describe the reference group and the age of the seniors differently.
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From page 149... ...
They note that most wage-risk studies reveal little about the relationship between age and WTP for mortality-risk reduction even when an age-interaction variable is included in the specification. That is because the simpler specification implies a linear relationship with age, which is expected only under the most restrictive assumptions.
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From page 150... ...
However, it urged EPA to support more research on the question and argued that a variation in VSL with age should not be ruled out on theoretical grounds. It also recommended against a constant VSLY, noting that the empirical evidence does not support the assumption that VSL is proportional to remaining life expectancy, which is an implicit assumption when a constant VSLY is used.
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From page 151... ...
. That practice is in direct conflict with the literature on WTP for mortality-risk reductions inasmuch as WTP is found to change less than proportionally with life expectancy and to be no different or even greater in the chronically ill compared with the healthy (see below)
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From page 152... ...
Empirical Evidence on Effect of Health Status on WTP to Reduce Mortality Risk Few empirical studies have examined the effect of health status on WTP to reduce mortality risk. Alberini et al.
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From page 153... ...
Economic valuation of the reduction in mortality rate can be derived directly from available WTP studies, which provide WTP values to reduce annual mortality risks. However, economic valuation of changes in life expectancy are not as straightforward and, with stated-preference approaches, are difficult to communicate to respondents, although these issues could perhaps be addressed with further empirical research.
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From page 154... ...
Comments from respondents suggest that some share of them dismiss the risk reductions as too small to be worthwhile. There appears to be a tendency to view an increase in life expectancy as adding time at the end of life when quality of life may be diminished rather than recognizing that an increase in life expectancy means an increase in the probability of survival in all future periods.
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From page 155... ...
Although the ExternE analysts selected a range of VSLY estimates, they used an approach that presumes a constant VSLY, which ignores the evidence that this value is likely to vary with age. FINDINGS AND RECOMMENDATIONS Finding: The charge to this committee concerns monetary valuation of mortality-risk reduction for regulatory impact analyses that are based on the basic premises of cost-benefit analysis.
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From page 156... ...
Finding: Both economic theory and the empirical evidence are inconclusive about how individuals' WTP for reducing their own risk vary with two important individual characteristics: age as a proxy for remaining life expectancy and health status. Although we conclude that the empirical evidence is insufficient to support a specific quantitative adjustment to the WTP for reduction in annual mortality risk based on differences in remaining life expectancy, we do not reject the concept that such adjustment may be appropriate.
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From page 157... ...
Finding: The use of a constant value for life years saved in the valuation of increases in life expectancy requires the assumption that WTP values for mortality risk reductions be consistently declining with increasing age. The empirical evidence does not support that assumption and therefore does not support the use of a constant VSLY.
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From page 158... ...
However, the lower WTP as a result of lower remaining life expectancy in the elderly may be offset to some extent by higher WTP because of poorer health status or higher baseline risk. Although results in the empirical literature are not consistent, several studies suggest that WTP to reduce mortality risk does not change or declines slightly with age.
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From page 159... ...
More fundamental research is needed to explore and develop methods for communicating and valuing changes in mortality risk that reflect the full life cycle. Studies to date have focused on WTP for annual changes in mortality risk, but the risk change of interest in most pollution-control assessments is more comprehensively described as a shift in the survival curves, which are plots of survival probability in all future periods and from which life expectancy is derived.
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