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B The Valuation of Health Damages Yu Lei and Mun S. Ho B.1 Introduction In order to compare the costs and benefits of policies, economists often monetize health damages. For example, the U.S. Environmental Protection Agency’s Guidelines for Preparing Economic Analyses provides a discussion of the various methods of estimating the value of statistical life for use in valuing the reduction in mortality rates due to environmental policies (U.S. EPA 2000, chapter 7). Our previous integrated study, Ho and Nielsen (2007), used valuations derived from a survey reported in the same book by our colleagues Zhou and Hammitt (2007), along with evidence from an earlier Harvard China Project study (Wang and Mullahy 2006) and from the international literature, to monetize the benefits of green taxes. The yuan values of the health benefits give us a common metric to compare to the yuan costs of lower consumption or lower GDP. The valuations of the damage reduction due to the policies examined in this book are given in chapter 9. In this appendix we explain how we derived our valuation parameters. The methodology and reasoning behind the valuation of environmental damages is discussed comprehensively in many places, including the previously cited U.S. EPA (2000) and Viscusi and Aldy (2003). Some specific studies for China are discussed in Ho and Nielsen (2007, chapter 9). We summarize this discussion briefly here for those who may not be familiar with this literature. Two different measures have been used to monetize health effects; one is the “human capital” approach, which simply counts the wages lost and medical costs of illnesses or premature death. This method ignores pain, loss of leisure time, and other losses, and economists prefer a more comprehensive measure of the losses when available. We thus have the second measure, the “willingness-to-pay” (WTP) approach that is closer to the preferred measure of welfare. The WTP for, say, a 394 Appendix B reduction in the risk of contracting chronic bronchitis during the year is the maximum amount an individual is willing to pay in exchange for such a reduction. The two main approaches used to estimate the WTP, discussed next, will give an idea of the concepts involved. One common method used to assess the WTP is by comparing the wages of different occupations with different risks. Jobs that have a higher risk of injury, illness, or death such as those in coal mining, construction, or emergency services pay a higher wage relative to less risky jobs with otherwise equivalent attributes, such as skill level. Economists ascribe this gap to the amount needed to compensate workers for these higher risks. From information about wages for different occupations and the probability of fatal accidents or other health risks, analysts derive a measure of the WTP to avoid those risks. The method is known as a “revealed preference” approach, because values of the worker (WTP to avoid risk) are revealed by his or her market preferences (in this case in the labor market, choosing a job with known risks at a particular wage). We know of only one revealed preference study in China, Guo and Hammitt (2009), which was conducted earlier in the Harvard China Project. The second method, the “contingent valuation” (or “stated preference”) approach, involves surveying people about their valuation of risks in a hypothetical setting. For example, Zhou and Hammitt (2007) asked randomly selected adults in three parts of China questions like the following: (1) how much they were willing to pay to prevent a minor illness like a recent cold; (2) how much they were willing to pay to reduce their lifetime chance of developing chronic bronchitis by 5 percent from an initial risk of 18 percent; and (3) how much they were willing to pay to reduce their probability of death in the next year by 1 in 1000, from an initial level of 7 in 1000. The value of statistical life (VSL) is essentially calculated by dividing the mean amount people were willing to pay by the reduction in mortality risk: VSL = ⎛ ⎝ ⎜ ⎞ ⎠ ⎟ WTP 1 1000 (B.1) From their survey results, Zhou and Hammitt estimated a mean VSL between 230,000 and 500,000 yuan in 1999. In this study we use the results from the contingent valuation surveys for the VSL to value the mortality effects. Given the lack of estimates for morbidity WTP values in China, we use a simple cost of illness (COI) method. We describe these in turn in the...


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