# Cost-Benefit Analysis. Survey Results Assume that as a result of the drinking water in Cambridge, you now face a 1/100,000 annual risk of getting cancer.

## Presentation on theme: "Cost-Benefit Analysis. Survey Results Assume that as a result of the drinking water in Cambridge, you now face a 1/100,000 annual risk of getting cancer."— Presentation transcript:

Cost-Benefit Analysis

Survey Results Assume that as a result of the drinking water in Cambridge, you now face a 1/100,000 annual risk of getting cancer from pansaric, a low-level carcinogen. How much would you be willing to pay, on your annual water bill, to eliminate this risk? 1) \$0—18.2% 2) \$25—23.37% 3) \$50—19.48% 4) \$100—27.27% 5) \$500—11.68% Median: \$50 Average: \$101

Survey Results Assume that because of current safety technology on cars, you now face a 1/100,000 annual risk of dying in a car crash. How much more would be willing to pay, for a new car, to eliminate that risk? 1) \$0—10.4% 2) \$25—2.09% 3) \$50—4.16% 4) \$100—27.08% 5) \$500—56.27% Median: \$500 Average: \$311

Survey Results Assume that because of current safety technology on cars, you now face a 1/100,000 annual risk of dying in a car crash. How much more would be willing to pay, for a new car, to eliminate that risk? 1) \$0—10.4% 2) \$25—2.09% 3) \$50—4.16% 4) \$100—27.08% 5) \$500—56.27% Median: \$500 Average: \$311

Four Theories Social Welfare (Cba as best way to get there; Pareto vs. Kaldor-Hicks) Autonomy (“the Easy Case”) Counteract behavioral biases (availability, unrealistic optimism, risk-risk tradeoffs) Providing a wide viewscreen (data on post- 9/11 driving)

Alternatives to CBA Feasibility (“do it if you can!” Precautionary Principle (“reduce risks”) Expert judgment Maximin (minimize worst-case scenarios) Democratic/political judgments Well-being/happiness (back to Bentham?) And what about distribution/dignity/equity?

(Hypothetical) Example 1: Rear Visibility Cameras Costs: \$1.8 billion Benefits from lives saved (50): \$450 million. Benefits from injuries avoided (150): \$100 million. Benefits from property damage avoided: \$200 million. Net? More than \$500 million in losses.

Rear Visibility, Mirrors Cost: \$100 million. Benefits (3 lives): \$45 million. Benefits (10 injuries): \$10 million. Benefits (property damage): \$20 million. Net? -\$25 million

Rear Visibility, Sensors Cost: \$400 million Benefits (10 lives): \$90 million Benefits (40 injuries): \$30 million. Benefits (property damage): \$80 million. Net? -\$200 million

What does law require? “expand the required field of view to enable the driver of a motor vehicle to detect areas behind the motor vehicle to reduce death and injury resulting from backing incidents, particularly incidents involving small children and disabled persons. The Secretary may prescribe different requirements for different types of motor vehicles to expand the required field of view... Such standard may be met by the provision of additional mirrors, sensors, cameras, or other technology to expand the driver’s field of view.”

What Would You Do? What questions do you ask, as a lawyer? A reasonable view: [...] What questions do you ask, as Secretary of Transportation? What questions do you ask in OIRA? Would any option be unlawful? Is any option clearly better as a matter of policy?

What the Government Did Long deliberation Chose cameras (across the board) Cost way down – cameras coming anyhow (market? Anticipating regulation?) Shortfall of hundreds of millions Lawful? Sensible? Lessons for CBA?

Issues Valuing children Parental anguish Ease of driving Breakeven analysis To monetize or not to monetize? Feasibility better? Expert judgment better? Precautionary principle better?

Detour: Value Of A Statistical Life Around \$9 million The theory: welfare, autonomy Evidence: Surveys Too hypothetical? Evidence: Revealed preference studies Too noisy? Some anomalies: demographic groups show differences

Value of a Statistical Life Heterogeneity? Across groups? Old vs. young? Children? Rich vs. poor? Across risks? Sudden unanticipated death vs. cancer death? The theory calls for disaggregation; but the practice is a unitary number Should there be disaggregation?

Value of a Statistical Life Alternatives? Government practice? Some kind of deliberation?

Example 2: Pilot Fatigue An accident in Buffalo Outline of the data Appropriate options? What happened Compare: Train safety. What happened. Compare: Truck drivers: a wrinkle

Example 3: Arsenic in Drinking Water 3 ppb: \$900 million, save 30 lives and prevent 50 illnesses – clear shortfall 5 ppb: \$500 million, save 15 lives and prevent 30 illnesses – shortfall 10 ppb: \$200 million, save 10 lives and prevent 20 illnesses – small shortfall 20 ppb: \$100 million, save 7 lives and prevent 10 illnesses – no shortfall

Arsenic Issues Distributional considerations: Some people are poor; some are rich. How should that affect EPA’s thinking? Arsenic protection excluding the poor? Arsenic targeting? Arsenic reduction subsidies? Arsenic federalism? Information disclosure instead?

Example 4: Disability Wheelchair access cost: \$600 million. Monetizable benefits: \$400 million. Dignity? Equity? How value? Ask disabled people, per visit? (Suppose cost, per visit, is 10 cents; \$7; \$50; \$200.) Ask “society”? (Budget constraint?)

Example 5: Prison Rape Cost: \$500 million. Number of prison rapes every year: 260,000 How should DOJ think about this? Benefit of preventing rape? \$300,000? (Surveys) \$400,000? (Court cases) Rape vs. prison rape? Suppose that there are \$300 million and \$1 billion alternatives. Then what?

Example 6: Financial regulation Cost is \$500 million Designed to reduce risk of meltdown How do the analysis?

Example 7: Affordable Care Act Ban annual or lifetime limits How do the analysis?

A Puzzle: Discounting OMB: 7 percent and 3 percent. Easy case: Costs incurred in the future. Agency does not discount. That is a mistake! Investment value and time preference. But what is discount rate? One view: risk-free rate of return. 3 percent. Or: “the risk premium on leveraged corporate capital “ (7 percent) Easy case: Dollars on both sides. Does not discount benefits. That is a mistake.

Discounting, continued In next ten years: Costs of \$200 million every year. Easy case. Should discount accordingly. In next ten years: Prevent 50 deaths every year. Harder case. Question: Discount deaths? (What theory?) Question: Or discount WTP to prevent deaths?

Discounting, continued Over 100 years! Imagine you will live to 500. (Yoda.) Technical reasons for low discount rate Ethical reasons for low discount rate (complicated) Individual case? (Yoda?) Across generations, how different?

A Puzzle: Unemployment Effects The consequences of losing a job are really bad, in terms of long-term economic effects and effects on subjective well-being. Should government ignore, on ground that people will eventually find jobs? Should government “catalogue and consider”? Or turn into monetary equivalents? Who’s your daddy? The challenge of “happiness” and a striking finding

A Puzzle: The Incidence Issue Arsenic: An Easy Case (people pay for what they get) Silica: A Hard Case? Clean Air: A Hard Case? Welfare vs. distribution VSL in poor nations?

Legislative Reform Put CBA into statute? Supermandate? (Endangered species? National ambient air quality standards? Occupational safety and health standards?) Judicial review? Republicans? Democrats? New President?

The Future: Five Issues A challenge: Well-being units? A challenge: Silica and hard cases A challenge: Disaggregated VSL (children? Old people?) A challenge: Particulate matter (old people?) A challenge: Discount rates

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