The debate about speeding inevitably raises the question of whether it is possible to put an economic (more specifically, monetary) value on lives lost in road crashes (the term ‘accident‘ is a misnomer). A more appropriate way of putting the question is to ask whether there is a monetary cost that is ‘reasonable’ to spend for a given expected reduction in the number of road fatalities. This way of putting the question gets us away from impossible questions of the form “How much is Joe Smith’s life worth”.

Before looking at the reasonable ways of answering this question, I’ll mention a couple of obviously unreasonable ones. The first is to look at damages awarded by courts. The most glaring problem with this measure is that dead people generally can’t sue, so the measure yields the conclusion that it’s better to kill someone than to injure them (a feature of the legal system of which defence lawyers are only too well aware). But in any case, the courts have to make an estimate and must either rely on the divine wisdom of judges (not an approach I like) or use one of the other techniques discussed below.

A second unreasonable approach is to use lost earnings. This immediately yields the conclusion that it’s OK to kill anyone over retiring age, and that medical treatment should be refused to such people. Since retired people have both money and votes its clear that in any system where resources are allocated either by markets or by democratic governments, this idea won’t stand up.

There are two reasonable approaches, which yield broadly consistent results. The first is to look at the wage premiums demanded by workers in dangerous jobs. There’s some tricky econometrics in this as the most dangerous jobs tend to be filled by relatively low-skilled workers and its necessary to account for this in the estimation. Another point that needs to be borne in mind is that while the wage premium is usually expressed in terms of the extra pay for a given increase in death risks, higher death risk is usually accompanied by higher injury risk and there’s no good way of separating the two.

The second is to look at social and individual decisions about health care. This tells how much national health services and individual health care purchasers are willing to pay for given interventions. The standard measure here is a Quality Adjusted Life Year (QALY) the idea being that one extra year of life in perfect health might be worth two extra years with serious pain or incapacitation.

Although there is a wide range of variation, typical values from the wage premium studies imply that an increase in risk that causes one extra death per year will be associated with a wage premium of $US 5 million per year. QALY studies find that buyers are willing to pay for health care interventions with a cost of $US 100 000 per QALY gained, which amounts to $US 5 million for saving the life a 30 year old with a life expectation of 80 (some discounting issues arise here, but these are still on the research frontier).

Taking account of exchange rates, and the fact that incomes are slightly lower in Australia than in the US, I’d say that a reasonable estimate based on these numbers is about $A 6.5million. In addition, it’s necessary to take account of some factors specific to car crashes. Easily the most imporant is the negative externality imposed on nonmotorists in urban areas by the need to avoid cars, and the restrictions on mobility created by busy roads. These externalities mean that the cost of dangerous driving to nonmotorists is around twice the cost of deaths and injuries.

All up, this implies that the social cost per life lost on the roads is between $5 million and $10 million, with a best estimate of $7.5 million. Because health is a superior good, this can be expected to rise slightly faster than nominal income over time.