This past week, my ECONS102 class covered health economics. As part of that topic, we cover the value of a statistical life (VSL) [*]. When I was looking up the current VSL for New Zealand, I realised that a pretty important change earlier this year had completely passed me by. As reported in this Newsroom article:
Over the past 30 years, there's a strong economic argument to be made that government has not valued human life highly enough; it failed to acknowledge that New Zealanders placed greater value on saving their friends, family and neighbours from injury or death than they did on shaving a few seconds off their morning commute.
Last month, that changed. With no fanfare, no press release, no ministerial statement, the transport agency Waka Kotahi published a document entitled Monetised benefits and costs manual v1.6 April 2023. The 429-page manual is a dense compendium of tables, formulae and, to the layperson, impenetrable economic justifications for obscure policies.
But buried in this manual are two big changes to v1.5, published two years earlier. It raises the value we place on saving time stuck behind a wheel driving to and from work, from $7.80/hr to $19.53 an hour – an increase by a factor of 2½. That figure increases to as much as $36.18/hr if that's what it costs to avoid being stuck in congestion.
And at the same time, it increased an esoteric number called the VoSL – the Value of a Statistical Life – from $4.88m to a somewhat breathtaking $12.5m. That's an even bigger increase.
That's not an inconsequential change (for reasons I will come to a bit later), but it is very surprising. And that's because:
In 1991 government researchers completed a survey of 700 New Zealanders to find out what value they placed on safety.
They wanted to measure the amount society would pay for the avoidance of one premature statistical death – and they did it by asking individuals the amount they would pay for safety improvements. They came up with a Value of a Statistical Life of $2m.
A new more thorough survey in 1998 doubled the figure to $4 million – but the government of the day refused to adopt it, seemingly dismayed at the cost implications for road, rail and aviation infrastructure.
So it is that the flawed 1991 survey result has been updated in line with wage inflation, every subsequent year. Extraordinarily, that outdated and discredited survey was still used to decide whether or not to build transport and other infrastructure – until now.
That's right. Until earlier this year, the VSL that was used in government decision-making was based on a survey of 700 people conducted in 1991. Among other uses, the VSL is a number that is used to measure the benefits of road safety improvements. If straightening a road, or reducing the speed limit, or installing median barriers, would save on average one life per year, then the value of those benefits was equal to $4.88 million per year. And now, that value has jumped to $12.5 million.
The Newsroom article argues that this means that more road safety projects would be funded. It isn't quite that simple. The government (or, rather, Waka Kotahi NZ Transport Agency) calculates benefit-cost ratios for each potential project, then ranks those projects from those with a high benefit-cost ratio, to those with a low benefit-cost ratio. Not all projects with a benefit-cost ratio greater than one (that is, those with benefits that outweigh costs) will be funded, as the roading budget doesn't stretch that far. Some projects with benefit-cost ratios less than one (that is, those with benefits that are smaller than costs) may be funded, depending on the political priorities of government. [**]
If all potential roading projects have similar road safety improvements and travel time savings, then the ranking of those projects wouldn't change. So, even though the benefit-cost ratios would be more favourable, there would be no additional roading projects funded, and the projects that were funded would be no different. However, to the extent that not all projects result in the same road safety improvements, the change in the VSL will tend to shift benefit-cost ratios in favour of projects with greater statistical lives saved.
Moreover, because the change in the VSL is greater than the change in the value of travel time savings, the benefit-cost ratios will tend to shift more in favour of projects that result in road safety improvements, and less in favour of projects that result in travel time savings. And that means that we can expect more roads with median barriers and slower speed limits in the future, and fewer road changes that result in travel time savings.
*****
[*] This is now often termed the 'value of a preventable fatality'. The difference is mostly semantic, but I buy into the argument that the old terminology feels somewhat uncomfortable when discussing with non-economists.
[**] Many times, politics trumps good economics.
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