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On Balance: Should We Believe Willingness to Pay to Remove Novel Environmental Threats?
09/22/2020

September 22, 2020
By: Joel Huber

Novel threats call us to action. Witness the response to the 9/11 attack and more recently to the coronavirus. Such risks may be particularly compelling if citizens do not understand how to deal with the harm or because of ambiguity around the probability that the threat will be realized. 
W. Kip Viscusi, Jason Bell and I present results from a series of national surveys that assess the public response to risks that appeared in news stories and lacked specific probabilities.  The article, “The Perception and Excessive Valuation of Small, Publicized Drinking Water Risks,” is in the 2020 issue of the Journal of Benefit Cost Analysis (11, 2). In it we assess the appropriateness of using household willingness to pay to eliminate drinking water risks to guide policy. Three large scale studies supported by the EPA explore household willingness to pay to combat threats to drinking water safety: prescription drugs in ground water, plastic bottles with BPA, and the weed killer atrazine in drinking water. The article shows that homeowners would accept substantial costs per year to resolve these threats.  The public expressed greater willingness to pay when they believed that these hazards posed a threat to them, but they also had high valuations when they were not sure if they faced an actual risk. These payments increase reasonably with income level, education, and other risk avoiding behaviors, like bottled water drinking, and with expressed behaviors, like membership in an environmental organization.
 
The fact that values expressed in such surveys vary in appropriate ways provides evidence that respondents understood the survey task and that willingness to pay values reasonably follow the intensity of the emotion connected to the threats.  However, the article also provides evidence that monetary willingness to resolve a threat overstates the value of reducing the underlying risks.  The average annual expressed willingness to pay in 2020 dollars is $207 for BPA, $113 for Atrazine and $171 to remove prescription drugs. For policy purposes, a reasonable value for a statistical death is $10,000,000 in 2015 US dollars (Viscusi, Pricing Lives, 2018). Related to that benchmark, the three threats to water studied should each generate a social welfare loss comparable to that of at least 2,500 lives lost each year to justify the expressed willingness to pay from all US households.  None of the three water quality problems tested had scientific evidence of harm remotely close to these levels.
 
Part of the problem is that information provided, which matched the information given to the public, specified the threat but not its probability of occurring. That lack of information about the likelihood of individual harm generates ambiguity around that probability of harm.  Ambiguity is itself aversive and leads to efforts to resolve it.  In this case, too much so.
 
These natural reactions to uncertain risks suggest a need to be wary of the possibility that short-term public reaction and willingness to pay for dimly understood risks could distort public policy. The article suggests that basing policy interventions on the public’s reaction to possible but probabilistically unspecified events could result in wasteful policy recommendations.
 
Distortions of decisions from ambiguous risks are not limited to ordinary citizens exposed to a novel threat. They color the reactions of the entire body politic, which in turn can create pressures for government action. Ambiguity is a part of today’s fast changing environment in which history provides only a fragile and uncertain guide. Regulators and legislators are people, potentially subject to similar reactions to ambiguity. Basing policies on benefit-cost analysis with objective assessments of the risk rather than irrational fears can help guard against this tendency.

Joel Huber is the Alan D. Schwartz Professor of Marketing at the Fuqua School of Business at Duke University.
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