maximum value: the hourly wage one can earn on the job. If one
chooses an additional hour of work over leisure, then the worker must
value leisure no higher than the going wage rate.- Environmental costs and benefits also are intangible and difficult to
value. One indirect market approach compares property values in
high-pollution areas versus those in otherwise comparable low-
pollution areas. The difference in property values reflects the cost the
market assesses for pollution.
SOCIALLY DETERMINED VALUES Society, via its norms and laws, places mon-
etary values on many nonmarketed items. Workers’ compensation laws deter-
mine monetary payments in the event of industrial injuries. Judges and juries
determine the extent of damages and appropriate compensation in contract
and tort proceedings. In divorce cases, the court frequently is asked to deter-
mine the monetary value of a homemaker’s contribution to the family. Gov-
ernment regulations implicitly determine societal values. For instance, federal
law requires special access for the handicapped in public buildings and public
transit. Presumably, the cost of meeting this requirement represents a lower
bound for the value society places on easy access.482 Chapter 11 Regulation, Public Goods, and Benefit-Cost AnalysisCHECK
STATION 5How might each of the preceding approaches provide dollar values in the following sit-
uations: (a) the costs (across all dimensions to all affected parties) of accidents in the
chemical industry and (b) the cost of noise pollution for residents near busy airports?VALUING LIVES Perhaps the most controversial application of benefit-cost
analysis occurs in the valuation of lives. Many of us would like to believe human
life is priceless and beyond monetary measure. Yet a host of government pro-
grams involves determining whether enhanced safety, not only in the form of
injuries prevented but also in terms of lives saved, is worth the cost. As men-
tioned earlier, the decision notto spend $240 million on a program expected
to save 50 lives means that the value of a life is less than $4.8 million, the
implied cost per life. In short, spending or not spending on public safety pro-
grams implicitly or explicitly involves valuing lives.
A number of approaches to estimating the dollar value of a life have been
taken. Although none can produce a definitive dollar value, the methods do
target a likely value range. A first approach, the earningsmethod, appeals to
the labor market for an answer. Boldly stated, the value of a life is measured by
the present value of an individual’s lifetime wage earnings. Depending on the
precise assumptions, studies that have used the earnings approach have pro-
duced estimates in the range of $3 million to $4 million per life. Of course,
many would argue that the presumption “you’re worth what you earn” consti-
tutes a gross understatement of a life’s value. (One would never want to apply
this method to unemployed or retired people.)c11RegulationPublicGoodsandBenefitCostAnalysis.qxd 9/29/11 1:34 PM Page 482