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Unit 6: Risk, Exposure, and Health // Section 7: Benefit-Cost Analysis and Risk Tradeoffs

Why are so many hazardous materials widely used in technology and commerce? Simply put, they also deliver benefits. For example, lead was used for decades as a gasoline additive in the United States (and is still used in developing countries) because it reduces "knocking," or pinging in the engine from premature fuel combustion. In many cases the full human health impacts of such materials were not known at the time when they entered use but only became clear years later, when they were common ingredients of commercial products.

When risk analysis shows that a material poses serious human health risks, policy makers often carry out formal economic analyses of risk reduction options. This involves setting an economic value on lives saved and injuries or illnesses avoided through policy actions, so that decision makers can compare these health benefits to the cost of proposed regulations. Most major environmental laws do not require use of cost-benefit analysis. For example, the Clean Air Act directs regulators to set national air quality standards that scientific evidence indicates will protect public health. One exception, the Safe Drinking Water Act, was amended in 1996 to require cost-benefit analysis of new standards.

Currently the federal Office of Management and Budget requires U.S. government agencies to do cost-benefit analyses of regulations that are expected to have economic impacts (positive or negative) of $100 million or more—some 50 to 100 rules annually (footnote 19).

One widespread method for monetizing health benefits is called hedonic valuation—analyzing what people are willing to pay to live in an unpolluted area or willing to accept as a salary premium for working in a risky industry. Economists often calculate these values by looking at what workers earn in high-risk industries compared to less-dangerous fields (Fig. 12) or by comparing housing prices in polluted and clean areas. This method is also called the revealed-preference approach, on the assumption that society strikes balances between risks and benefits that are reflected in economic decisions.

Commercial king crab fisherman, Alaska

Figure 12. Commercial king crab fisherman, Alaska
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Source: Alaska Division of Community and Business Development.

In a survey of more than 30 risk premium studies conducted in U.S. workplaces between 1974 and 2000, W. Kip Viscusi and Joseph Aldy found that the average calculated value of a statistical life (VSL) was about $7 million. One way to think about this figure is to imagine a population of 1 million people who are considering a regulation that would result on average in one fewer death from cancer each year. If each member of the group is willing to pay $7 per year as a cost of imposing that regulation, the value of a statistical life in that society can be said to be $7 million. This figure measures the collective value placed on reducing a generalized risk, not the value of any actual person's life. EPA guidelines recommend using a value of $6.2 million for regulatory impact analyses, while some other agencies use lower values (footnote 20).

Analysts also monetize the benefits of regulations by measuring costs that those regulations can be expected to avoid, such as medical bills, lost wages due to illness and disability, and special aid programs for children born with birth defects due to exposure. Table 3 lists health effects considered by EPA in a 2006 regulatory impact analysis in support of national limits for fine particulate air pollution (some effects were not quantified because of limitations in data or methods).

Table 3. Human health effects of particulate air pollution Source: U.S. Environmental Protection Agency, Regulatory Impact Analysis, 2006 National Ambient Air Quality Standards for Particle Pollution, October 6, 2006, p. 5-5,
Quantified and Monetized Effects Unquantified Effects
Premature mortality, based on cohort study estimates Low birth weight
Bronchitis (chronic and acute) Pulmonary function
Hospital admissions: respiratory and cardiovascular Chronic respiratory diseases other than chronic bronchitis
Emergency room visits for asthma Nonasthma respiratory emergency room visits
Nonfatal heart attacks UVb exposure (may result in benefits or disbenefits)
Lower and upper respiratory illness
Minor restricted-activity days
Work loss days
Asthma exacerbations (asthmatic population)
Respiratory symptoms (asthmatic population)
Infant mortality

Cost-benefit analyses also set values on environmental impacts, such as improved visibility in scenic areas or protection of undeveloped land as wilderness. Sometimes monetizing these effects is straightforward because people pay for access to the resource and demand is likely to drop if the resource becomes less attractive. For example, researchers have assessed the economic impact of air pollution in national parks by measuring how sharply pollution events reduce visits to parks and calculating the resulting lost revenues, both at the park and in surrounding communities.

Contingent valuation is a less direct approach that involves asking people what they would theoretically be willing to pay for an environmental good. This method is often used to estimate demand for a resource for which a market does not currently exist. For example, if a power company proposes to dam a wild and scenic river to produce electricity, analysts might ask ratepayers whether they would be willing to pay higher rates for electricity from another, more expensive source to keep the river undeveloped. It can be hard to estimate accurate values with this method, which has generated a vast economic literature, but well-designed willingness-to-pay studies can provide reasonable indications of how highly the public values specific environmental benefits.

Many risk-management choices involve risk-risk tradeoffs—choosing between options that each may cause some harm. We make risk-risk tradeoffs every day. Some are personal choices, such as pursuing an intensive exercise program which has cardiovascular benefits but could lead to injuries. Others involve broad social regulations. For example, some environmental groups support an international ban on the insecticide DDT because of its toxic human and animal health effects, but many public health agencies argue that this step would make it very difficult to control malaria in the developing world.

Regulators may consider many criteria when they confront risk-risk tradeoffs and have to decide which risks are and are not acceptable. Important factors include both the probability of a risk and whether its consequences would be negligible, moderate, or serious (Fig. 13).

Risk management model

Figure 13. Risk management model
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A high-consequence event, such as a plane crash or a radiation release at a nuclear power plant, can merit intensive regulation even if the probability of such accidents occurring is very low. Conversely, risks that have high probability but low consequences for the general public—for example, injuries from slipping on icy sidewalks—can be addressed through lower-level actions, such as passing local ordinances that require property owners to clear their sidewalks. Once officials decide what level of risk is involved, cost-benefit analysis may influence their choice of responses if it shows that one policy will produce much greater benefits relative to costs than another policy.

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