Marginal Revolution: Viscusi Interviewed

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Viscusi Interviewed

The Federal Reserve Bank of Richmond's Region Focus interviews Kip Viscusi. Here is one good bit:

...in the case of Superfund cleanups of hazardous wastes, the people who benefit from the cleanups are not paying the costs directly and thus demand the most stringent standards possible. The result is that the median cost per cancer case averted is about $7 billion. It’s off the charts because you are using the responsible parties’ money to clean up the site. In contrast, if you look at the amount of money people are willing to pay for houses that are not exposed to hazardous waste risks, you don’t observe that kind of large trade-off at all. It’s more like $5 million rather than $7 billion. Similarly, the premium that workers require to work in relatively dangerous jobs is a lot less than what government agencies spend on regulations.

Posted by Alex Tabarrok on August 15, 2007 at 07:16 AM in Economics | Permalink

Comments

It would be nice to see a citation to this:
"The result is that the median cost per cancer case averted is about $7 billion."

I think there is general agreement that people tend to be more risk averse than was previously believed. It is also well understood that people have difficulty judging the degree of risk for extremely rare events. The chances of these happening are over estimated while more common ones are under estimated.

The current example is the risk of "terrorist" attacks in the US. It is estimated that all the steps taken to reduce risk (internal and external) now exceed $1 trillion. Any politician that is foolish enough to use Kip Viscusi's economic analysis in this case will quickly be selling apples on a street corner.

So if risk is evaluated in a non-economically rational manner then perhaps there needs to be a new model which acknowledges this. Perhaps peace of mind needs to be given a monetary value.

Posted by: robertdfeinman at Aug 15, 2007 9:46:44 AM

Robert a non-economical way to reduce the distortion is to measure lives for lives. IE for a trillion dollars we could save X lives another way.

Posted by: Floccina at Aug 15, 2007 11:15:50 AM

Floccina:
Each year over 40,000 people are killed in auto accidents, yet the amount of money spent on making auto transport safer is negligible.

Gun deaths in the US are 14.24 per 100,000 while in Canada the number is 4.31. Obviously there are forces at work which determine how societies approach problems which are not based upon economic or cost-benefit considerations.

What these factors are and how to deal with them is what separates the various schools of economists.

Posted by: robertdfeinman at Aug 15, 2007 12:08:15 PM

"Similarly, the premium that workers require to work in relatively dangerous jobs is a lot less than what government agencies spend on regulations."

This makes sense, although perhaps not at the observed magnitude. We would expect risk to be taken in the private sector by the people who want the smallest fee for taking that risk, where as regulations are targeted more to the average risk taker. So even with a perfect regulatory system we'd see persistent differences between cost to avoid a death in the private (voluntarily undertaken risk) and regulatory sectors (involuntarily undertaken risk).

Posted by: OneEyedMan at Aug 15, 2007 12:35:59 PM

You might want to note EPA's draft response, found here.

As someone working on a site that could have been listed on the NPL but was not (due to the actions of my client -- the city overlying the contamination plume), I have the following points to make:

1. Cancer averted is only one measure of the health benefits of a cleanup. Perchlorate, for example, inhibits thyroid function, especially in neo-nates.

2. More generally, Superfund and its state law equivalents are now being used to transfer back to the discharger the costs of impacts to potable water. Since communities near old polluted sites tend to be poorer and since water service providers tend to be small local entities, if dischargers weren't forced to bear this cost, small poor communities would have to.

3. Whatever happened to common law ideas of nuisance and trespass? For a group of libertarians, you are pretty quick to tell innocent downstream landowners that their use of property is limited in perpetuity because it's cheaper to society as a whole to allow the pollution plume to remain in the ground.

4. I'm not persuaded that median costs are the best measure.

Posted by: Francis at Aug 15, 2007 2:09:54 PM

Although the general point might be right, I don't think this is an issue of local homeowners externalizing costs onto polluters. Most CERCLA/Superfund cases are either brought by the government or brought by one company suing previous site owners. They're seeking the cleanup required by the statute.

To be sure, the statute probably requires more cleanup than is sensible, but that's a different problem--it's a poor political choice to reduce risk to the point of elimination, even when it does silly things like requiring industrial areas to be as clean as a national park. But that's not a result of overly aggressive plaintiffs, but rather a result of an overly aggressive congress.

Posted by: ah at Aug 15, 2007 2:10:10 PM

ah: CERCLA (aka the Superfund law) provides for a private right of action. Many cleanup lawsuits are instituted by private parties. Looking only at litigation where EPA was the plaintiff misses the point.

In California, where I practice, virtually every major pollution plume affects a usable groundwater resource. This includes the LA Basin, the Sacramento area and the Inland Empire (Riverside and San Bernardino). What's happening is that polluters who had successfully externalized the impacts of their illegal discharges are now being forced to properly internalize those costs.

So before we talk about billions of dollars per avoided cancer, let's look a lot more closely at the costs necessary to remediate a source of drinking water.

Posted by: Francis at Aug 15, 2007 4:28:21 PM

Robert;

Are you saying that because (1) people are known to have biases, and (2) people tend to spend other people's money differently than they spend their own, then we should adjust our models so that the biased answers and shifted costs are the new normal? Otherwise, I think your objections are already answered in the linked interview.

Also, "Private Values of Risk Tradeoffs at Superfund Sites: Housing Market Evidence on Learning about Risk", Gayer, T., Hamilton, J. T., and Viscusi, W. K., The Review of Economics and Statistics, August 2000, Vol. 82, No. 3, Pages 439-451

Posted by: Eric H at Aug 15, 2007 7:13:58 PM

Suppose I am an uninsured driver and I cause an automobile accident that totals another person's car. Should I be responsible for paying that person the fair market value of that car, or would I be justified in paying some lesser amount? After all, a 30-year-old station wagon will get one around town just as well as a Lexus SUV.

Posted by: mdemon at Aug 15, 2007 8:10:49 PM

Eric H.,

What is the price range of the houses studied in the paper you cite?

Posted by: Bernard Yomtov at Aug 15, 2007 10:49:38 PM

Mdemon
Yes, according to Calabressi.The cost of accidents

Posted by: JEAN at Aug 16, 2007 7:59:42 PM

That is a lesser amount since tort law is a way to redistribute money from the poor to the rich

Posted by: JEAN at Aug 16, 2007 8:01:19 PM

Bernard, I don't know. I was providing the answer to robert's query about a citation for the figure at the top.

Posted by: Eric H at Aug 16, 2007 10:41:27 PM

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