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Working Paper: Valuing Health Risk Changes Using a Life-Cycle Consumption Framework

Paper Number: 2011-03

Document Date: 04/2011

Author(s): Stephen C. Newbold

Subject Area(s): Economic Impacts

JEL Classification: Health: Government Policy; Regulation; Public Health; Demographic Economics: Value of Life; Forgone Income; Environmental Economics: Valuation of Environmental Effects

Keywords: vsl; life-cycle model; benefit-cost analysis; social welfare analysis; qaly; health-wealth tradeoff

Abstract: Government agencies routinely use the “value of a statistical life” (VSL) in benefit-cost analyses of proposed environmental and safety regulations. Here I review an alternative approach for valuing health risks using a “life-cycle consumption framework.” This framework is based on an explicit individual-level lifetime utility function over health and income at all ages, and so could be used to examine any pattern of health risk changes over a person’s lifespan. I discuss several potential advantages of this framework, both positive and normative. From a positive perspective, this framework can support a functional benefit transfer approach that is more flexible and potentially more accurate than the standard point-value benefit transfer approach based on the VSL, and it can be used to evaluate mortality and morbidity effects simultaneously in an internally consistent model. From a normative perspective, it provides a natural foundation for a social welfare function and therefore could facilitate a unified evaluation of efficiency and equity, as a supplement to traditional benefit-cost analysis.

This paper is part of the Environmental Economics Working Paper Series.

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