Valuing Benefits and Costs 483A second approach examines the amounts of compensation individuals
demand for bearing the risk of death. Other things being equal, high-risk
jobs—law enforcement, firefighting, skyscraper construction, mining, lum-
berjacking, oil drilling, to name a few—pay higher wages. The wage pre-
mium that people demand for taking on a greater risk of death, gives us an
idea of how they value increased or decreased risk of death. For example,
for skyscraper construction workers, the additional mortality risk is approx-
imately .2 percent per year.Suppose the wage premium paid to such workers
(again relative to a comparable low-risk job) is $12,600 per year. What con-
clusions can we draw from these facts? If a construction firm hires, say, 1,000
workers, it pays a total wage premium (due to risk) of $12.6 million and
2 deaths will occur on average. The implied value of a life is 12.6/2
$6.3 million.
Proponents argue that the risk-cost trade-off embodied in private markets
is the best guide to valuing lives when it comes to government decisions.
However, for several reasons, the method is likely to underestimate a life’s dol-
lar value. An individual who chooses a high-risk occupation is likely to be more
risk loving than the average person and, therefore, demand a lower wage pre-
mium. (If compensation for the average person were closer to $15,000, the
value of a life would be $7.5 million.) In addition, workers in dangerous occu-
pations may be inadequately informed about the true risks. Values for lives
inferred from such decisions may reflect (at least partially) poor judgment, as
well as calculated risks. Also, many high-risk jobs may go to people who, due to
their socioeconomic status, have few other options.
U.S. regulatory agencies use different dollar amounts for valuing lives,
ranging from $5 million at the Food and Drug Administration (FDA) to almost
$9 million at the Environmental Protection Agency. While there is no single
correct value, it’s important to remember that higher values mean higher ben-
efits (relative to costs) and so tip the scales toward a greater degree of safety-
related regulation.^22(^22) On valuing lives, see W. K. Viscusi, “How to Value a Life,” Journal of Economics and Finance. 32
(October 2008): 311–323; and B. Applebaum, “As U.S. Agencies Put More Value on a Life,
Businesses Fret,” The New York Times, February 17, 2011, p. A1.
The FDA, AZT,
and AIDS
Revisited
The regulation of therapeutic drugs, such as AZT, poses particularly difficult problems
because three kinds of market failure are present at once. First, external benefits asso-
ciated with new drugs are enormous. Thus, strong patent protection for developers of
new drugs can provide incentives for investment in high-cost and risky R&D in the first
place. But patent laws remedy one kind of market failure at the expense of a second.
Under patent protection, the developer has a 20-year monopoly on the sale of the drug
and, naturally, attempts to establish monopoly prices in order to maximize available
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