Monetary estimates of changes in fatality risk are often expressed in terms of the Value of a

Statistical Life (VSL). This term is easily misinterpreted and should be carefully described when

used in benefit analysis. In particular, VSL refers to the WTP for reductions in the risk of

premature death aggregated over the population experiencing the risk reduction; that is, VSL

refers to the sum of many small reductions in fatality risks. The basic assumption underlying the

VSL approach is that equal increments in fatality risks are valued equally. For similar reasons,

the VSL approach is only appropriate for marginal changes in the risk of death and should not be

used to value more significant changes. Because changes in individual fatality risks resulting from

environmental regulation are typically very small, the VSL approach is usually acceptable for

these types of benefit analyses.

7.1.2 Overview of Discounting

What is discounting?

In general, people prefer current consumption to future consumption. In other words, a $1

today is worth more today than a $1 tomorrow is worth today, and that dollar continues to

decrease in value as you go further out into the future. (This concept is also referred to as the

social rate of time preference or the time value of money. This is a different concept than

inflation, which is a general increase in the price level of goods and services.) Discounting is the

process of converting that future dollar into a value that can be compared to the value of a dollar

today. The discount rate expresses this process in quantitative terms. The higher the discount

rate, the faster value decreases over time. For example, $1 twenty years from now is worth

$0.55 today at a 3% annual discount rate, but worth only $0.26 at a 7% annual discount rate.

 

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