Economic Efficiency and Cost-Benefit Analysis 4 Are jobs that are created as a r

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Economic Efficiency and Cost-Benefit Analysis 4 Are jobs that are created as a result of a social project considered as a benefit, a cost, or 5 Some suggest that a dollar value cannot be placed on life; that is, life is priceless. Explain 6 Does it matter whether a higher or lower discount rate is applied to the CBA of a social 7 Discuss possible reasons why the estimates of the value of life presented in Table 4.1 8 How does the willingness-to-pay principle of welfare economics differ from the valua- 9 Figure 4.6 shows equity as point D, or equal outputs. If we defined equity in terms of 10 Distinguish between cost-benefit analysis (CBA) and cost-effectiveness analysis (CEA) 11 The text noted that cost-effectiveness analysis began with the military. Consider the plan- both? how the dilemma to social decision created by this view might be resolved. project? If so, why? differ so much. tion of an extra life-year in applying Q equal inputs, how would our answer change? Why? Can CEA replace CBA in all cases? If not, why not? ning of a military intervention against an enemy. How (conceptually) would one measure ALYs? benefits? Is it easy (or possible) to do so? 12 If a society has a fixed budget that it can devote to all interventions, formulate a priori- tizing rule that would save the greatest number of years of life for a given budget. Exercises 1 Using Figure 4.3, explain why a pollution abatement program that reduces discharge 2 beyond Q, is inefficient. Consider the following two projects. Both have costs of $$,000 in Year 1. Project 1 pro- vides benefits of $2,000 in each of the first four years only. The second provides benehts of $2,000 for each of Years 6 to 10 only. Compute the net benefits using a discount rate of 6 percent. Repeat using a discount rate of 12 percent. What can you conclude from this exercise? Consider the following table of costs and benefits from a governmental policy to clean 3

Explanation / Answer

Ans-7

The value of life is an economic value used to quantify the benefit of avoiding a fatality. It is also referred to as the cost of life, value of preventing a fatality (VPF) and implied cost of averting a fatality (ICAF). In social and political sciences, it is the marginal cost of death prevention in a certain class of circumstances. In many studies the value also includes the quality of life, the expected life time remaining, as well as the earning potential of a given person especially for an after the fact payment in a wrongful death claim lawsuit.

Their reasoning varies, but I’ve heard garbled versions all of the following:

1. People can’t pay more than they have, and most people have well under a million dollars.

2. People earn around $40,000 per year after taxes, and most have under 25 years left to work. So if you multiply annual earnings by remaining working life, most lives are worth under a million.

3. People need most of their income to live. So if you measure the value of life by people’s willingness to pay to stay alive, it’s probably no more than $10,000 per year.

Ans-8

WTP/QALY ratios vary noticeably based on demographic and socioeconomic characteristics of the subject, but also on their attitude towards risk. Knowing the expression of preferences by patients from this outcome measurement can be of interest for health service planning.The quality-adjusted life year (QALY) is a measure of clinical effectiveness, based on utility, which is used to compare different programs and technologies. The different proposals to estimate a threshold of acceptability for a QALY are based on one of the fundamental elements of the market: supply and demand . When considering supply, we can attempt to estimate the optimal price of a QALY by searching to identify the threshold of the incremental cost per QALY that the budget characteristics of the institution facing the expense could afford. From the side of demand, considering the relevant threshold as the monetary value society places on marginal health gains, the value of the QALY can be empirically estimated with some preference elicitation method, such as the contingent valuation (CV) method. This method consists of directly asking subjects about their Willingness to Pay (WTP) for a good or service, building a hypothetical scenario where the interviewees play the role of demand and the interviewer plays the role of the supply. CV has been widely used for the purpose of obtaining the values attributed to a QALY by citizens. CV allows direct assessment of the preferences of the interviewees, which is considered valid if it is in accordance with classic economic theory. However, the valuation of a QALY through CV has limitations. The construct of a QALY assumes the equality of value for all subjects regardless of their individual characteristics (income level, education, health condition, etc.). Besides, it would be expected that the metrics to measure value and health are linearly related. However, the majority of published studies find that these two assumptions do not come true. The function relating WTP with potential health gains is not linear but concave so that, even though the increase of both variables is related, they are not proportional, especially for large increases in outcome when the budget constraint appears. Additional aspects remain unclear, such as discrepancies resulting from the use of different analytical approaches, from evaluating different magnitudes in health condition changes, and from different question formulation or periods of payment. Subjects’ health condition at the study’s onset can also influence the expression of the WTP for health outcome. When evaluating the results of this type of studies, the adopted perspective.

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