Air Pollution Costs for Non-Economists: A small glossary for a big and costly problem

September 9, 2016

The Cost of Air Pollution report seeks to strengthen the economic case for acting to curb air pollution and save lives. Although the message is clear – air pollution costs are staggering and should be reduced through policy action -- some of the terms used in the report can easily be misunderstood. We answer here frequently asked questions.

Can welfare losses and forgone labor output be added together to give a fuller picture of air pollution costs?

Welfare losses and forgone labor output should not be added together because they are based on fundamentally different approaches to valuing the costs of premature deaths. Welfare losses are a measure of well-being; forgone labor output is a measure of income. 

What do economists mean by forgone labor output?

Forgone labor output represents the lost income that people would have earned over their remaining working life, discounted to the present year, had they not died prematurely. Like other accounting measures such as the Gross Domestic Product (GDP), forgone labor output is not intended to be a measure of a society's well-being. This leads to the second approach to valuing the costs of premature deaths: the welfare-based approach.

What do economists mean by welfare losses?  

Economists try to capture the loss of well-being in a society due to premature mortality using a measure of how much individuals are willing to pay to reduce their chances of dying. When people who are surveyed tell economists how much they are willing to pay to reduce their fatality risk, they are thinking about much more than their paychecks. Welfare losses may also reflect the loss of enjoyment that people get from intangibles such as being alive or spending time with loved ones. Welfare losses are often used by governments to estimate the costs and benefits of environmental regulations. When welfare losses are high, they can tilt the balance in favor of actions that save lives, for example by improving air quality. 

Do the costs of premature mortality estimated in the World Bank-IHME report represent a loss of GDP?

No. The cost of pollution estimates presented in the World Bank-IHME report do not represent the reduction in a country's GDP due to pollution. The report compares costs to GDP to provide a scale of the problem. Furthermore:

- Lost labor income is estimated as the loss of lifetime earnings for working age men and women discounted to the present year.  GDP, on the other hand, includes only current wages for working age men and women and not lifetime earnings.

- Welfare losses are based on what individuals are willing to pay to reduce their risk of mortality.  Welfare is a measure of a person’s quality of life which is derived from being able to enjoy income, but also good health, company of family, etc. GDP, on the other hand, is a measure of income only.

Do the costs calculated in the World Bank-IHME report include health care costs?

No, the report only looks at the costs of premature deaths. It does not tally medical costs related to treating diseases attributable to air pollution such as lung cancer heart disease, strokes or chronic bronchitis. Nor does it tally other costs such as loss of agricultural productivity caused by air pollution. 


Api
Api