Monday, June 11, 2012
Rowell on Double-Discounting and the Undervaluation of Willingness-to-Pay to Avert Pollution Harms
I belatedly read Arden Rowell's (Illinois) terrific article, "The Cost of Time: Haphazard Discounting and the Undervaluation of Regulatory Benefits," 85 Notre Dame L.Rev. 1505 (2010). She argues convincingly that regulators systematically underestimate individuals' willingness-to-pay to avert mortality risks from pollution and other harms by, in effect, double-discounting. In willingness-to-pay surveys, analysts ask how much people would pay to avoid a future risk of harm (e.g., cancer risks from exposure to toxic chemicals), but they do not ask when those people would pay. That is to say, the surveryors fail to assess the extent to which surveyed individuals are providing already discounted present values of risks. If surveyed individuals already discount their own valuations of future harm, when analysts aggregate the data and then apply a discount rate of 7% or 3%, as OMB rules require, they are in effect double-discounting, and therefore grossly underestimating actual aggregate willingness-to-pay, leading to systematic under-regulation of risks. Rowell's article makes an immense contribution to the cost-benefit literature, which should be read by every scholar working in the field, not to mention the regulators, who should make changes in the way surveys are conducted and analyzed to avoid any double-discounting that inevitably would lead to socially inefficient under-regulation.