Economic Analysis in Transportation Systems Tapan K. Datta, Ph.D., P.E. CE 7640: Fall 2002

Chapter 3: Highways and Engineering Economy  All highway-related employees work for the public  Road users are the customers  When we perform new road building or existing road improvement - the beneficiary is the road user  The road user gets the direct benefits such as- Reduction in travel time - Reduction in crashes  Non-Road users may be impacted as well

Non-Road User Consequences  In order to minimize costs we cannot ignore impacts on non-road users.  Example: When you build or improve a congested road then the first beneficiary is the road user.  Reduction in emissions will benefit everyone  Sometimes road users and non-road users consequences are difficult to separate

Non-Road User Consequences are Not Included in: 1. Annual Cost 2. Present Worth 3. Benefit to Cost Ratio 4. Rate of Return

Various Groups of Consequences  Commodity Savings  Traffic Crash Reductions  Travel Time Reductions  Personal Preferences  Community Consequences

Various Groups of Consequences Commodity Savings - Are real, tangible, direct money savings - Construction Material - Other Construction Related Commodities such as: a. Use of Heavy Equipment b. Labor c. Transportation of Material d. Others

Commodity Savings  In terms of road user - Commodity savings are in vehicle running costs. Including: - Fuel - Oil and Maintenance - Insurance (function of how many miles you drive)

Traffic Crash Reduction Costs  There are Two Kinds of Costs Related to Traffic Crashes: 1. Actual Incurred Costs 2. Societal Costs.  National Safety Council (NSC) publishes statistical data on traffic crashes: 1. Car repair/replacement cost 2. Medical bills 3. Lost production 4. Many other factors

NSC Data, 1999  Cost of motor-vehicle crashes  Death $970,000  Nonfatal Disabling Injury$35,300  Property Damage Crash$6,400  Motor-vehicle injuries by severity  Incapacitating injury (A)$45,800  Nonincapacitating injury (B)$15,300  Possible injury (C)$8,700

Example: The existing annual crashes for a 1 mile length corridor are as follows: Traffic Crash Reduction

Suppose, the improvements to the study section results in:  20% Reduction in Fatal Crashes  30% Reduction in Injury Crashes  30% Reduction in Property Damage Only (P.D.O.) Crashes  Expected Crashes after improvement are: Fatal = 1 - 1*0.2 = 1 – 0.2 = 0.8 crashes/yr Injury = 8 – 8*0.3 = 8 – 2.4 = 5.6 crashes/yr P.D.O. = 41 – 41*0.3 = 41 – 12.3 = 28.7 crashes/yr

Total accident costs = 0.8 * 970, * 35, * 6,400 = $1,157,360 Benefits= 1,514,800 – 1,157,360 = $357,440 Initial cost of improvement = $ 250,000 Reduction in accidents is considered as benefit. Improvements to the study section (Continued)

Travel Time Reduction  Method of estimating travel time ~ consider: -Diverted Traffic -Generated Traffic If you do not estimate the above, you will not be fair.  Value of Time ~ How do you get it? -Recreational Trips are Ranked First -Personal Trips are Ranked Second

Personal Preference  Improved Highways Provide: - Comfort - Convenience - Uniformity in driving speeds  The basic premise of the analysis for economy is that the cost of acquiring and operating a highway facility should over time return to the public (Tax Payers) its initial costs (Const. Costs, annual operating expenses, annual maintenance costs, plus compensation for the sacrifices (VESTCHARGE) Part of Road User Benefits

No project is good unless it paid off its cost, that is the project is not feasible unless the B/C > Or no project is good unless its Rate of Return is greater than the Vest charge. Personal Preference (Continued)

Community Consequences  Aesthetics  Business and Trade  Community Pride  Education  Land Values and Land Uses  National Defense - Evacuation  Postal Services

 Protective Services such as: - Police - Fire - Ambulance  Recreation  Social Interchanges IV. Community Consequences (Continued)

Applications of the Analysis for Economy 1. To measure the economic justification of proposed highway or improvement 2. To measure the economic choice between mutually exclusive features of design - Project formulation 3. To assist in Project Scheduling - Prioritizing

Applications of the Analysis for Economy (Continued) 4. Cost allocation - Who pays 5. To measure relative justification of Highway with other Public Works.

Chapter 4: Identification and Measurement of Highway Benefits Benefit: Consequence of highway improvements  gain  profit  Savings vs. Benefit  Identification of Benefits  Reduction in costs  Reduction in travel time  Increases in net income  Improvement in comfort and convenience

Road User Benefits  Reduction in Running Costs  Reduction in Travel Time  Reduction in Accidents

Consumer (Road Users) Surplus When price of travel is lowered to P 1 then:  Net Total Savings = V 0 (P 0 - P 1 )  ABC = Variable Benefit  Total Net Benefit = V 0 (P 0 - P 1 )+(P 0 - P 1 )(V 1 -V 0 )*1/2  P 0 P 1 BA = Net Gain P0P0 P1P1 V0V0 V1V1 D0D0 D0D0 A B C No. of Units Unit Price Consumer Surplus Demand Curve Varied amount of Benefit

Consumer Surplus Consumer Surplus = The area between two curves above the line AE + area P 0 P 1 FE The higher the consumer surplus the better is the project justified. P0P0 P1P1 V0V0 V1V1 D0D0 D0D0 A C Volume Cost per vehicle trip D1D1 D1D1 P2P2 E F G Consumer Surplus V3V3 V2V2 H B Figure 4.2

Consumer Surplus The price goes down because travel time goes down, the delay goes down, the accidents go down etc. (all reflect on the price to go down)

Road User Benefit and Consumer Surplus  Refer to Figure 4.2  P 0 P 1 BA for curve D 0 is net benefit or gain  Area added to original consumer surplus is the area between 2 demand curves above AE plus the area P 0 P 1 FE.

Elasticity of Demand  It shows demand is influenced solely by change in price.  Improved highways provide more than just change in price, such as  comfort  convenience  others D0D0 D0D0 V0V0 V1V1 P0P0 P1P1 No. of Veh. Unit Price A

 Certain amount of demand are not depending on price  Price is elastic for certain range after that range it is not elastic Demand P0P0 P1P1 Unit Price Not sensitive

Inelastic Character of Demand Some part of travel is a necessity, so some travel must take place. Types of Trips  Work Trip - No choice  Recreational Trip - Some what choice trips  Time of travel is also a function of trip purpose Shopping trips Recreational trips  For those flexible trips - price does not go up Flexibility

Road User Benefit and Traffic Components Benefits to the existing traffic  When a highway is improved the existing road users get the full benefit of improved travel scenario  Net Benefit for Existing Traffic = Cost of travel before improvement - cost of travel after improvement

Benefit to Generated Traffic  Savings in travel costs does not apply here  Road user productivity Benefit to Diverted Traffic = cost of existing travel - cost of travel using the improved highway

Road User Cost  Time :  Travel time has some value Driver Passenger  How to estimate it? - Origin Destination Survey - Roadside survey - Other

Determining Value of Time by Questionnaire Survey Such surveys will give four types of answers 1. Overestimated value of time -may be a few 2. Underestimated value of time -even smaller number 3. Inaccurate answer due to misunderstanding of marginal value of recreational time 4. Some will be good answers, but you would not know who they are

Value of Time Better Approach Assessing what value people put on time in their observed behavior Three Methods of Observations are Possible 1. Travel route tracking O-D survey: can show who, how much the travel time differs and operation cost difference AB Lowest travel time route Least cost route

Value of Time (Continued) 2. Comparison of speed with travel time saved - Higher the speed, higher the cost = difference in travel time for O-D pairs and associated cost differences 3. Comparison of alternative modes of travel. Stanford Research Institute - Value of Time By: Dan Haney

Value of Time by Dan Haney 1. Willingness to pay Economic value of savings in travel time To illustrate the willingness to pay definition of the value of time (V), the benefit/cost (B/C) ratio computation of economic worth of a highway improvement proposal is considered in a simplified form as follows: B/C = R = (Value of time * Δt + Δu)/Δh

Value of Time B/C = (VΔt + Δu)/Δh where, V = Value of time in $/Pass. Veh. Hr. Δt = Savings in annual travel time in Pass. Veh. Hrs. = t existing - t proposed Δu = Savings in annual user costs in $ Δu = u existing – u proposed Δh = Increase in annual highway costs in $ Δh = h proposed - h existing

Effect of Value of Time on B/C  If Value of Time, VOT < V 1  Prop. C will have B/C < 1  Prop. C will have highest B/C if VOT < V 2  If VOT is between V 2 & V 3, Prop. B is the best  If VOT > V 3, Prop. A is best Value of Time, $/hr B/C A B C Alternative Project Proposals B/C = 1.0 V1V1 V2V2 V3V3 1.0

Cost of Time Concept  A commodity is desirable if its utility > Cost  Time savings also has a utility and a cost  The cost of time concept is defined as the actual cost of providing time savings on a specified project.  For each project cost of time ‘C’ can be calculated as: C = (Δh - Δu)/Δt where, Δh - Δu = Net change in annual transportation costs Δu = Savings in annual user costs = u existing – u prop. Δh = Increase in annual highway costs = h prop. - h existing

 If B/C = 1.00  Cost of Time = Willingness to pay for time savings The project will break even if B/C = R = 1.0 = (V Δt + Δu)/Δh  V = (Δh - Δu)/Δt or V=C  In very few cases B/C = 1.0 or < 1.0  B/C is generally > 1.0 Cost of Time Approach (Continued)

 B/C = R = (VΔt + Δu)/Δh > 1.0 VΔt + Δu > Δh We know, C = (Δh - Δu)/Δt Hence, Δh = CΔt + Δu Then, VΔt + Δu > CΔt + Δu or C < V Cost of Time Approach (Continued)

Value of Time According to Winch  Lost time due to increased travel time needs to be made by company by using additional workers  Another assumption  Any person unemployed as a result of the highway improvement can find another job  Value of working time saved involves in more work being done, rather than in unemployment

Demand Curve for Driver’s Services  Represents amount of work done in 1 hour before improvement as the unit, with a constant wage rate per hour  may be community’s avg. income/hr  The curve takes into account the demand for driver’s services that result from other cost changes, such as vehicle operation costs, which accompany changes in operating costs

Demand Curve for Driver’s Services O P P'P' QQ'Q' A B D D Amount of Work $ (Average wage rate) dQ dP Area = OA x dP Area = ½ dP x dQ

 OQ units of service are purchased at a price of OP  After improvement OQ’ units are purchased at a price OP’  The gain to the employer is the area PABP’

 Assuming that the demand curve is linear between A and B, the area =OQ * dP + ½ dP*dQ = dP (Q + ½ dQ)  Elasticity of demand is defined as P/Q * dQ/dP  Elasticity of demand is negative  Since dP is negative It is convenient to regard all changes and elasticity as positive

Using the following notation: T = travel time in hrs/person/day before improvement E = elasticity M = # of persons employed before improvement W = wage rate per hour R = proportional reduction in travel time achieved by improvement V = value of time saved

Thus, P = OP = W dP = RW Q = OQ = TM dQ = E*dP*Q P Since, E = P/Q * dQ/dP

V = dP ( Q + ½ dQ) = RW * TM + ½(E*RW*TM) W  V = RWTM (1 + ½ ER) This way the value of time for drivers are determined.