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Environmental economics


Health impacts are often a significant portion of the benefits of improvements in environmental quality. We know that, for example, air pollution can cause ill-health (morbidity) or can lead to fatal illnesses (mortality). However, we often cannot reduce risks to zero without incurring significant and disproportionate costs.

Individuals try to strike a balance between risk and costs (financial or otherwise) for themselves. Society needs to seek such a balance as well. If we did not, then we would use resources inefficiently: for example, we might spend money on reducing air pollution that would save more lives if spent on health care.

If we seek to balance the costs of a policy against its benefits, then we must compare the benefit of reductions in risk against costs. Any decision in this context means placing an implicit monetary value on health benefits. Decision-making will be easier and become more consistent if we have a monetary estimate of the value of health benefits.

The monetary value represents the strengths of society's preferences. It is consistent with people's observed actions. For example, while no one would trade their life for a sum of money, most people will be prepared to choose between safety equipment with different prices and offering different levels of safety. We can use these values for small changes in risk when assessing the benefits of policies that also deliver small changes in risk over large populations.

In air quality benefit assessments, the value of reducing the risk of fatalities can often be 80 per cent of the total benefits when health impacts are expressed in monetary terms. It is therefore important that as one of the inputs to decision-making we can monetise changes in risk and that we use the best available understanding of existing practice when doing so. Environment DG therefore held a workshop on 13th November 2000 that brought together some of the experts in the subject to examine methodology and findings.

Five papers are attached which explain the background to this workshop and its findings.