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COPYRIGHT 2002 University of Pennsylvania, Law School
INTRODUCTION
Many analytical approaches to setting environmental standards require some consideration of costs and benefits. Even technology-based regulation, maligned by cost-benefit enthusiasts as the worst form of regulatory excess, typically entails consideration of economic costs. Cost-benefit analysis differs, however, from other analytical approaches in the following respect: it demands that the advantages and disadvantages of a regulatory policy be reduced, as far as possible, to numbers, and then further reduced to dollars and cents. In this feature of cost-benefit analysis lies its doom. Indeed, looking closely at the products of this pricing scheme makes it seem not only a little cold, but a little crazy as well.
Consider the following examples, which we are not making up. They are not the work of a lunatic fringe, but, on the contrary, they reflect the work products of some of the most influential and reputable of today's cost-benefit practitioners. We are not sure whether to laugh or cry; we find it impossible to treat these studies as serious contributions to a rational discussion.
Several years ago, states were in the middle of their litigation against tobacco companies, seeking to recoup the medical expenditures they had incurred as a result of smoking. At that time, W. Kip Viscusi--a professor of law and economics at Harvard and the primary source of the current $6.3 million estimate for the value of a statistical life (1)--undertook research concluding that states, in fact, saved money as the result of smoking by their citizens. (2) Why? Because they died early! (3) They thus saved their states the trouble and expense of providing nursing home care and other services associated with an aging population. (4)
Viscusi didn't stop there. So great, under Viscusi's assumptions, were the financial benefits to the states of their citizens' premature deaths that, he suggested, "cigarette smoking should be subsidized rather than taxed." (5)
Amazingly, this cynical conclusion has not been swept into the dustbin where it belongs, but instead recently has been revived: the tobacco company Philip Morris commissioned the well-known consulting group Arthur D. Little to examine the financial benefits to the Czech Republic of smoking among Czech citizens. Arthur D. Little International, Inc., found that smoking was a financial boon for the government--partly because, again, it caused citizens to die earlier and thus reduced government expenditure on pensions, housing, and health care. (6) This conclusion relies, so far as we can determine, on perfectly conventional cost-benefit analysis.
There is more. In recent years, much has been learned about the special risks children face due to pesticides in their food, contaminants in their drinking water, ozone in the air, and so on. Because cost-benefit analysis has become much more prominent at the same time, there is now a budding industry in valuing children's health. Its products are often bizarre.
Take the problem of lead poisoning in children. One of the most serious and disturbing effects of lead contamination is the neurological damage it can cause in young children, including permanently diminished mental ability. Putting a dollar value on the (avoidable, environmentally caused) retardation of children is a daunting task, but economic analysts have not been deterred.
Randall Lutter, a frequent regulatory critic and a scholar at the AEI-Brookings Joint Center for Regulatory Studies, argues that the way to value the damage lead causes in children is to look at the amount parents of affected children spend on chelation therapy, a chemical treatment that is supposed to cause excretion of lead from the body. (7) Parental spending on chelation supports an estimated valuation of as low as $1100 per IQ point lost due to lead poisoning. (8) Previous economic analyses by the EPA, based on the children's loss of expected future earnings, have estimated the value to be much higher--up to $9000 per IQ point. (9) Based on his lower figure, Lutter claims to have discovered that too much effort is going into controlling lead: "Hazard standards that protect children far more than their parents think is appropriate may make little sense"; thus, "[t]he agencies should consider relaxing their lead standards." (10)
In fact, Lutter presents no evidence about what parents think, only about what they spend on one rare variety of private medical treatment (which, as it turns out, has not been proven medically effective for chronic, low-level lead poisoning). (11) Why should environmental standards be based on what individuals are now spending on desperate personal efforts to overcome social problems?
For sheer analytical audacity, Lutter's study faces some stiff competition from another study concerning kids--this one concerning the value, not of children's health, but of their lives. In this second study, researchers examined mothers' car-seat fastening practices. (12) They calculated the difference between the time required to fasten the seats correctly and the time mothers actually spent fastening their children into their seats. (13) Then they assigned a monetary value to this difference of time based on the mothers' hourly wage rate (or, in the case of nonworking moms, based on a guess at the wages they might have earned). (14) When mothers saved time--and, by hypothesis, money--by fastening their children's car seats incorrectly, they were, according to the researchers, implicitly placing a finite monetary value on the life-threatening risks to their children posed by car accidents. (15)
Building on this calculation, the researchers were able to answer the vexing question of how much a statistical child's life is worth to its mother. (As the mother of a statistical child, she is naturally adept at complex calculations comparing the value of saving a few seconds versus the slightly increased risk to her child!) The answer parallels Lutter's finding that we are valuing our children too highly: in car-seat-land, a child's life is worth only about $500,000. (16)
In this Article, we try to show that the absurdity of these particular analyses, though striking, is not unique to them. Indeed, we will argue, cost-benefit analysis is so inherently flawed that if one scratches the apparently benign surface of any of its products, one finds the same kind of absurdity. But before launching into this critique, it will be useful first to establish exactly what cost-benefit analysis is, and why one might think it is a good idea.
I. DOLLARS AND DISCOUNTING
Cost-benefit analysis tries to mimic a basic function of markets by setting an economic standard for measuring the success of the government's projects and programs. That is, cost-benefit analysis seeks to perform, for public policy, a calculation that happens routinely in the private sector. In evaluating a proposed new initiative, how do we know if it is worth doing? The answer is much simpler in business than in government.
Private businesses, striving to make money, only produce things that they believe someone is willing to pay for. That is, firms only produce things for which the benefits to consumers, measured by consumers' willingness to pay for them, are expected to be greater than the costs of production. It is technologically possible to produce men's business suits in brightly colored polka dots. Nonetheless, successful producers suspect that no one is willing to pay for such products, and usually stick to, at most, minor variations on suits in somber, traditional hues. If some firm did happen to produce a polka-dotted business suit, no one would be forced to buy it; the producer would bear the entire loss resulting from the mistaken decision.
Government, in the view of many critics, is in constant danger of drifting toward producing polka-dot suits--and making people pay for them. Policies, regulations, and public spending do not face the test of the marketplace; there are no consumers who can withhold their dollars from the government until it produces the regulatory equivalent of navy blue and charcoal gray. There is no single quantitative objective for the public sector comparable to profit maximization for businesses. Even with the best of intentions, critics suggest, government programs can easily go astray for lack of an objective standard by which to judge whether or not they are meeting citizens' needs.
Cost-benefit analysis sets out to do for government what the market does for business: add up the benefits of a public policy and compare them to the costs. The two sides of the ledger raise very different issues.
A. Estimating Costs
The first step in a cost-benefit analysis is to calculate the costs of a public policy. For example, the government may require a certain kind of pollution control equipment, for which businesses must pay. Even if a regulation is less detailed and only sets a ceiling on emissions, it results in costs that can be at least roughly estimated through research into available technologies and business strategies for compliance.
The costs of protecting human health and the environment through the use of pollution control devices and other approaches are, by their very nature, measured in dollars. Thus, at least in theory, the cost side of cost-benefit analysis is relatively straightforward. In practice, as we shall see, it is not quite that simple.
The consideration of the costs of environmental protection is not unique to cost-benefit analysis. Development of environmental regulations has almost always involved consideration of economic costs, with or without formal cost-benefit techniques. What is unique to cost-benefit analysis, and far more problematic, is the other side of the balance, the monetary valuation of the benefits of life, health, and nature itself.
B. Monetizing Benefits
Since there are no natural prices for a healthy environment, cost-benefit analysis requires the creation of artificial ones. This is the hardest part of the process. Economists create artificial prices for health and environmental benefits by studying what people would be willing to pay for them. One popular method, called "contingent valuation," is essentially a form of opinion poll. Researchers ask a cross section of the affected population how much they would be willing to pay to preserve or protect something that can't be bought in a store. (17)
Many surveys of this sort have been done, producing prices for things that appear to be priceless. For example, the average American household is supposedly willing to pay $257 to prevent the extinction of bald eagles, $208 to protect humpback whales, and $80 to protect gray wolves. (18) These numbers are quite large: since there are about 100 million households in the country, (19) the nation's total willingness to pay for the preservation of bald eagles alone is ostensibly more than $25 billion.
An alternative method of attaching prices to unpriced things infers what people are willing to pay from observation of their behavior in other markets. To assign a dollar value to risks to human life, for example, economists usually calculate the extra wage--or "wage premium"--that is paid to workers who accept riskier jobs. Suppose that two jobs are comparable, except that one is more dangerous and better paid. If workers understand the risk and voluntarily accept the more dangerous job, then they are implicitly setting a price on risk by accepting the increased risk of death in exchange for increased wages.
What does this indirect inference about wages say about the value of a life? A common estimate in recent cost-benefit analyses is that avoiding a risk that would lead, on average, to one death is worth roughly $6.3 million. (20) This number, in particular, is of great importance in cost-benefit analyses because avoided deaths are the most thoroughly studied benefits of environmental regulations.
C. Discounting the Future
One...
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