This time I will share two stories and we will get into the cost-benefit analysis. The final question is, can we put a price tag on life. If yes, how much?

Before we move onto the stories, let’s clarify the meaning of cost-benefit analysis first. The main idea is stated as this, the highest principle of morality, whether personal or political, is to maximize the general welfare or the collective happiness, or the overall balance of pleasure over pain, say, maximize utility. If we add up, all of the benefits from communities and subtract all of the cost, the right thing to do is the one that maximizes the balance of happiness over suffering. Whether you like this idea or not, it really goes under the name of cost-benefit analysis which is used by companies and governments frequently. And what is involves is placing a value, usually a dollar value, to stand for utility on the costs and benefits of various proposals.

The first story is about a tobacco company. They commissioned a study of cost-benefit analysis of smoking in some place and what their cost benefit analysis found was that the government gains by having citizens smoke. So, how do they gain?

The negative effects to the public finance of the local government included:

1.       Increased health care costs for people who develop smoking-related diseases.

The positive effects included:

1.       Various tax revenues that the government derives from the sales of cigarette products;

2.       Health care savings to the government when people die early, Pensions savings, you don’t have to pay pensions for so long.

3.       Savings in housing costs for the elderly. When all of the costs and benefits were added up, the study found that there is a net public finance gain of a 147 million dollars. And given the savings in housing and health care and pension costs, the government enjoys the savings of over 1200 dollars for each person who dies prematurely due to smoking.

At the end of this story, the study group issued an apology for this heartless calculation. Previously, they did not include the value to the person and to the families of those who die from lung cancer. What about the value of life?

Let’s take another example. In this story, we will talk about the famous Ford Pinto case.

Back to 1970’s, Ford Pinto was a small car, very popular. But is had one problem. The fuel tank was at the back of the car and in rear collisions the fuel tank exploded. Some people were killed and some severely injured.

Victims of these injuries took Ford to court to sue and in the court case it turned out that Ford had known about the problem about the fuel tank and had done a cost-benefit analysis to determine whether it would be worth it to put in a special shield that would protect the fuel tank and prevent it from exploding.

And of course, they did a cost benefit analysis.

The cost for fixing this problem is:

1.       11 dollars per part at 12.5 million cars and trucks came to a total cost of 137 million dollars to improve the safety.

The benefit of not spending all this money on a safer car:

1.       180 death * 200 thousand dollars / death

2.       180 injuries * 67 thousand dollars / injury

3.       200 vehicles * 700 dollars / vehicle

So the benefits turned out to be 49.5 million. So they decided not to install the device. Needless to say when this memo of the Ford’s cost-benefit analysis came out in the trial. They got into big trouble.