implications of alternative approaches in several of its cost-benefit analyses for air-pollution regulations. However, the agency has been using the same VSL estimates regardless of remaining life expectancy in its primary analyses. The Office of Management and Budget (OMB) has urged caution in adjusting VSL on the basis of age because of uncertainties in the literature (Graham 2003) but encourages sensitivity analyses with alternative measures of changes in mortality and its monetary valuation. This chapter examines the theoretical and empirical evidence regarding the relationship between age and WTP for mortality-risk reductions in later sections.
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. In addition, perhaps we should be considering the preferences of those at high risk (generally, those in poor health) regarding reduction in their mortality risk.
This chapter takes up the question of whether the VSL or the VSLY is more appropriate for EPA to use in valuing reductions in mortality risk associated with reduced exposure to ozone. It also considers what economic theory and the empirical literature say about how WTP for reductions in mortality risk varies with the age of the person at risk, the size of the risk change, the health status of those at risk (existing chronic illness vs average health and effects on quality of remaining life), income, and other socioeconomic variables to improve approaches for assigning values to reductions in risk.
As introduced in Chapter 2, cost-benefit analysis for a regulatory decision is intended to help answer the question of whether some proposed policy will result in more welfare for the affected people—that is, whether the expected benefits of the regulation are worth the expected costs. The standard approach to cost-benefit analysis is to quantify both costs and benefits in terms of “opportunity cost.” For benefits, that means a measure of what those who benefit would be willing to forgo to obtain the specified benefit. This is the basic concept of WTP, which is taken to be a measure of how much better off the members of the benefiting population perceive themselves to be, assuming that the members of the population have full information about the benefits.1
There is some debate in the literature on the foundations of welfare economics as the whether WTP is an appropriate measure of the welfare changes of individuals. For a recent overview of this debate, see Adler and Posner (2006), especially Chapter 2. WTP as