Cost-benefit analysis and relative position

Current estimates of regulatory benefits are too low and possibly far too l ow. This is because the standard economic approach to measuring costs and b enefits, which attempts to estimate people's willingness to pay for various regulatory benefits ignores a central point about valuation, thus producin g numbers that systematically understate those benefits. Conventional estim ates tell us the amount of income an individual, acting in isolation, would be willing to sacrifice in return for say, an increase in safety on the jo b. But while these estimates are based on the implicit assumption that econ omic well-being depends only on absolute income considerable evidence sugge sts that relative income is also an important factor When art individual bu ys additional safety in isolation he experiences not only an absolute decli ne in the amounts of other goods and services he can buy, but also a declin e in his relative living standards In contrast, when a regulation requires all workers to purchase additional safety, each worker gives up, the same a mount of other goods so no worker experiences a decline in relative living standards standards matter an individual will value an across the board inc rease in safety more highly than an increase in safety that he alone purcha ses. Where the government currently pegs the value of a statistical life at about $4 mil lion, it ought to employ a value between $4.7 million and $7 million. A conservative reading of the evidence is that when government age ncies are unsure how to value regulatory benefits along a reasonable range, they should make choices toward or at the upper end.