The Price of You

Saturday, November 8, 2014

I've already written about trying to price your services. But let me ask you a related question. How much are you worth? That is to say, what price should the country put on your life?

Non-economists would be aghast at that question, but its answer is central to the very way that the world works.

Let's take the classic economics example of streetlights. In a busy New York City, you'll find streetlights around every corner. It's very busy and it would be very dangerous to have lots of traffic moving about with no streetlights to prevent accidents.

What about a smaller place? Like Boca Raton, Florida? You'll find streetlights at almost every crossing, but not at every single one. Even less congested cities (such as Boynton Beach, Florida) might have fewer still and tiny villages in the middle of nowhere would hardly have any at all.

Most decent human beings would say that we should have streetlights at every intersection. The chance of others getting injured or even killed is something we have to stamp out entirely. But the truth of the matter is that governments have to decide how to spend their limited budgets. Each dollar spent on a traffic signal is a dollar that can no longer be spent to improve education or access to clean water or the quality of hospitals.

So economists calculate costs and benefits when deciding the most efficient outcomes. To simplify the math, let's say that it costs $20,000 to install each traffic signal and each traffic signal would eliminate any chance of a fatal collision.

• When a busy crossing has a 99% chance of a fatal collision without a signal, most cities would choose to install one. They believe that a human life is worth more than $20,200 ($20,000 / 99%).
• Now let's take a look at a less trafficked area. There's a crossing with a 1% chance of a fatality, should no lights be installed. The government would only install lights if they believed that each life was worth at least $2,000,000 ($20,000/1%).
• Now let's find some really isolated area. It's very unlikely that anyone will get killed at this street crossing. Let's say there's a 0.000001% chance of a fatality. Do you genuinely believe that a government should expend two trillion dollars ($2,000,000,000,000) to prevent a fatality at this crossing? Doesn't that seem like a bit of overkill? Can you think of more productive uses of that two trillion dollars?

We still haven't figured out exactly what a human life is worth, but we've started narrowing it down a bit by setting some limits on what a government should spend to protect a random person's life.

Spending unlimited dollars on traffic signals doesn't make sense. The price would quickly bankrupt any government and preclude other types of spending. At its heart, applied economics is about taking fundamentally limited resources and figuring out how they can be best applied to achieve the goals of society.

While we were able to look at the price of a human life in a very short blog post, there are other things that prove much more complicated to price - like software. If you'd like to learn how to set a price on your next software project, be sure to check out my pricing book Charge Like a Rhino: The Software Pricing Handbook.