Transportation Economics and Project Evaluation Evaluation process safety in evaluation process and intro to micro economics

Objectives of project evaluation  An objective and consistent method for the making of investment decisions Which alternative design for a project should we select? Which competing alternative approach should we invest in? Which project or projects should we invest in? What category of projects would it be most productive to invest in?  E.G., streets or water distribution

Exception Methodology  Manage by exception Invest what you have always invested unless an exception arises  Example City capital improvement budget – invest at the same level for every city service with a small increase for inflation. Budget for contingencies where system exhibits a chronic problem (e.g. excessive congestion)

Pros and Cons of Exception Method  Pros Easily understood by decision makers Requires minimal amount of decisions support systems  Cons No basis for making efficient decisions No basis for making trade-offs between categories Perpetuates past misallocation of resources

Traditional approach (popular)  Performance measurement Manage the performance of existing system  Pavement roughness  Delay encountered while traveling in system  Travel speed  Travel times  Etc. Establish minimum levels of performance Invest in projects which provide the maximum improvement in performance for dollars spent.

Pros and Cons of Traditional Approach  Pros Manages to measurable criteria Builds on good management practice Supportable to public and decision makers  Cons Supports past legacies decisions Difficult to make comparisons between investment categories Supports past misallocations of resources

Economic Evaluation (big idea)  Levels of decisions Operating and maintenance budget decisions What level of performance Project design level decisions Design decisions regarding a project User benefits of competing designs are assumed equal Project selection decision Give a number of alternatives for a project which one should be selected. Mutually exclusive options Network decisions Given a number of projects, which one should be invested in and when Non-mutually exclusive options Program allocation decisions Which category of investment should we invest in? Safety improvements or congestion reduction?

Operating budgeting decisions  Operating allocation – Budget to Meet performance identified in selection decision  Project selection process assumes operating costs allocation when the selection is made

Example project selection Performance level Time Maintenance Treatment Reconstruction Project 1 Performance level Project 2 Each assumes its ongoing cost of maintenance

Project Design Selection Criteria  Select project designs which Minimizes Life Cycle Costs  Assumes that all design alternatives provides similar user benefits Meets budget requirements Able to achieve minimum design standards

Project Selection Decision  Selects project from feasible alternatives  Projects are mutually exclusive Example – Two different alignments  Benefit and costs streams of project alternative vary  Comparison methodologies Benefit to cost ratio Minimum present worth Maximum internal rate of return  Comparison of incremental benefits and costs

Network Decision Making  Planning level decision making Should we invest in reconstructing the freeway in Council Bluffs, Davenport, four-laning U.S. 30, etc.  Non-mutually exclusive decisions  Compare the benefits and costs of one project to another  Decision making criteria Select project with greatest benefit to costs ratio Continue to select project until budget is exhausted or there are not more cost beneficial projects.

Program Allocation Decisions  There will always be projects where the benefits exceed the costs so which category of activity should we invest? Example – should we be investing more in education and less in transportation services? Example – should we be investing more in winter maintenance and less in bridge maintenance?

Program allocation decision  Trade-offs between categories are very difficult  Rarely done based on economic information  Political and equity concerns conflict with pure economic rational (deep thought)

Benefit – Cost analysis  Since transportation benefits are reduced cost, costs and benefits often get confused.  Costs are associated with the facility Capital costs  Construction costs  Right-of-way costs  Vehicle cost (if they are owned by the operator) Maintenance costs Facility operation

Benefit-Costs analysis  Reduced costs that are associated with benefits are related to the users Travel time costs  Total hours and cost of system travel  Travel time reliability Vehicle operating costs  Fuel  Oil  Insurance  Maintenance  Depreciation (vehicle ownership costs)  Tires Crash costs

Estimates of User Cost Savings  Travel time reductions Demand models Travel time reliability – user benefits are difficult to measure  Vehicle costs Measure through historical data  Value of reduced deaths and injuries Technical costs are easy to measure Human loss is difficult to measure

What is a human life worth  Industry must make trade-offs between safer cars and profits  Government must make trade-off between safer roads and expenditures on highways  Users make trade-offs between the likelihood of dying and travel convenience How many of you would like to drive at 5 mph?

Example 1 of Calculation  Ford Pinto Gas Tank Guard case Ford calculations Ford costs Guard costs $11 per guard Project run of pinto – 12.5 million Total retrofit cost $135,000,000 User cost 44 excess fatalities 530 excess injuries 7,500 excess PDOs

Example 1 continued Societal cost of excess fatalities and injuries Fatal $200,000 (NHTSA and Safety Council average) Injury accident $67,000 (very high) PDO $700 Total societal costs = $49,500,000 B/C = 2.8 in favor of not doing the retrofit

Example 1  Was Ford right or wrong?  Why?

Example 2 Right Turn on Red Estimated national savings User savings – 1.4 gallons/veh/year - 10 seconds/driver/day User costs - 22 excess fatalities excess injuries - 10,300 PDO B/C = 7.3 in favor of right on red

Comparison of two examples  Are you in favor of right on red?  Is right-on-red worth the extra fatalities?  Why is it that we feel better about the decision to adopt right-on-red and not about Ford’s decision?  How much should we be willing to spend to save a human life?

Example 3 The 9 Pennsylvania Miners that were trapped were rescued after 77 hours of drilling  The initial cost estimate of performing the rescue was $10,000,000 with a low probability of success (assume 25% probability of success)  Assume value of human life is $2.5 million  2.5*0.25*9 = $5.625 million  $5.625/$10 = B/C = 0.6

Why are we inconsistent in our perspective on human life  Anonymity “Identifiable Victim Effect” Jessica McClure, 9 Pennsylvania Miners  Assumed risk When the individual has accepted a higher level of risk Astronaut Sky diver

How Should We Settle the Costs  The nine miners rescued Actual cost – approximately $6 million The mining company cannot afford to cover these costs.  U.S. Rep. John Murtha, of Johnstown, obtained a $2 million federal grant  State of Pennsylvania shelled out about $2 million  Remaining balance owed private contractors is about $2 million How should we cover the unpaid cost? Disney is paying each miner $150,000 for their story – should this money be used to cover the costs?

So on what basis should we make decisions?  We need to recognize that people are willing to buy some benefits with human life Otherwise the speed limit would be 10mph.

How do we determine the value of Human Life  Societal value of life is the value to save one life. Not a specific life Not what you value your own life It is a statistical life

Methods for valuing life  Willingness to pay – what are we willing to pay to reduce total deaths by one fatality Since this is not a situation that is present in reality, we establish analogous situations.  Suppose that 5 million people were willing to buy a car with $100 safety improvement that would reduce their risk of dieing in car crash by one in 5,000. Thus we would be willing to pay $500 million to save 1,000 lives. Therefore, at a minimum society is willing to pay $500,000 for a life saved. Included in the willingness to pay is the willingness to pay to avoid the pain and suffering to avoid injury or death.

Pain and Suffering  Accounting for the quality life Quality-adjusted life years lost (QALY) Value assigned to a perfect health year = 1 Value assigned to a year of death = 0 Injuries fit on the continuum between 1 and 0

Methods for valuing human life cont.  Direct-costs avoided The amount of costs directly avoided by reducing by a single death.  Medical costs  Emergency services  Insurance administration  Etc.  Human capital approach The amount of economic value lost by a single death or injury.

NHTSA values for injuries and fatalities ItemIndividual CostPercent of Total Medical$22, % Emergency Service$ % Market Productivity$595, % HH Productivity$191, % Insurance Administration$37, % Workplace Costs$8, % Legal Costs$102, % Travel Delay$9, % Property Damage$10, % Quality of Life$2,389, % 2000 value of human life$3,366, %

What are states doing (1993 Survey)  Forty-five states assign a dollar value to fatality  Five states do not assign a dollar value but use priorities  Three clusters Eighteen states clustered around $500,000 Fourteen states clustered around $1.5 million Eight states between $2 and $3 million  Mean value $1,209,704

Factors Causing Crashes  Driver  Vehicle  Roadway  Environment

Economic Cost of Crashes  Cost to society: $230.6 billion/ year medical, rehabilitation and long term care cost ( $ 32.6 billion) Work place lost productivity $59 billion lost tax revenue (adding $200 from each household) property damage $59.8 billion Travel Delay $25.6 billion Source NHTSA

National Crash Frequency  Fatal Crashes – 37,795  Injury Crashes – 2,003,000  Property Damage Crashes – 4,282,000  Total killed 42,116 (5,500 were peds and cyclists)

National Crash Frequency  Fatal 1.51 Per HMVM per 100,000 people per 100,000 vehicles per 100,000 licensed drivers  Injury 109 per hmvm 1,065 per 100,000 people 1,371 per 100,000 vehicles 1,585 per licensed driver Source - FHWA

Fatal Crash Trends Source – FHWA Crash Facts Book

Crash Rate Trend Source – FHWA Crash Facts Book

Age Distribution of People Killed Source – FHWA Crash Facts Book

Fatality Rate by Age

Iowa Crashes (2000)  445 fatalities  100 had BAC > 0.1  63,371 crashes  35,974 injuries

Iowa Fatal Crash Trends

Crash Rate Calculation  Accounts for volume  May account for vehicle miles traveled (VMT) Crash rate = where: n = analysis time period in years (5 years for the Iowa DOT) DEV node = actual daily entering vehicles for nodes and average daily traffic for road segments (for road segments up to 0.6 miles long and spot locations) DEV link = Absolute value of [(Link length/0.3)x(Actual DEV)] (for road segments 0.6 miles and longer)

Crash Rate Example 350 crashes over 5 years 10,000 vehicles enter the intersection daily Crash rate = = _____(350 x 10 6 )_____ = 19.2 crashes per million vehicles (10,000) x 5 x 365

Severity  Measures seriousness of accidents  Iowa DOT (2001 values) Fatality: $1,000,000 Major Injury: $150,000 Minor Injury: $10,000 Possible Injury: $2,500 Property damage: actual value or $2,000 if unknown

Crash Trend Mn/DOT Traffic Safety Fundamentals Handbook

Fatality Rates in Upper Midwest Mn/DOT Traffic Safety Fundamentals Handbook

Location of Crashes Mn/DOT Traffic Safety Fundamentals Handbook

Crash Rates by Functional Class Mn/DOT Traffic Safety Fundamentals Handbook

Crash Rates by Design Standard Mn/DOT Traffic Safety Fundamentals Handbook

Crash Frequency on Mn Expressways

Crash Frequency on Iowa Expressways

Crash Type Distribution Mn/DOT Traffic Safety Fundamentals Handbook

Crash Rate per Accesses Mn/DOT Traffic Safety Fundamentals Handbook

Crash Rates by Intersection Control Mn/DOT Traffic Safety Fundamentals Handbook

Crash Type by Intersection Mn/DOT Traffic Safety Fundamentals Handbook

Improving Safety  3 aspects Driver  Driver training  Blood alcohol limits  Speed limits  Driver license restrictions Road  Design  Maintenance  operational Vehicle  Vehicle design has improved  Air bags  Better tires

Introduction to Economics  Economics is the study of scarce resources. Micro Economics is concerned with individual consumers and producers and groups of producers and consumers known as markets Macro Economics is concerned with economic aggregates or the economy as a whole Micro EconomicsMacro Economics PricingUnemployment DemandInflation SupplyMonetary policy

Elements of Economic Systems  Scarcity – all goods and services have relative degrees of scarcity  Activities Consumption of goods or services Production, conversion of inputs to outputs Exchange – trading objects for other objects

Markets – Demand-Supply Relationships  Demand Curves – The relationship between price and quantity consumed. Price Quantity

Characteristics of Demand  Demand refers to a relationship Quantity demanded refers to a point in the relationship  Demand is a reflection of wants and not needs  Demand curve defines what people would do when faced with certain conditions  Quantity demand is a function of time  Demand curves slope downward to the right

Market demand Individual 1 Individual 2 Market Demand Q1Q1 Q2Q2 Q3Q3 Q4Q4 P1P1 P2P2 Q 1 +Q 3 Q 2 +Q 4 2. Market Demand consists of two or more demanders of a good

Characteristics of Demand Market demand always has a slope that is greater or equal to individual demand curves  Price elasticities of demand is a measurement of the relative relationship between price and quantity demand. Slope is no good because it is dependent on scale

Arc Elasticity $6.00 $ Point Elasticity

Properties of Elasticities  Dimensionless  Demand elasticities are always negative  Demand elasticities are discussed in terms of absolute value Less then 1 = inelastic Equal to 1 = unitary elastic Greater than 1 = elastic  The elasticity of demand curves change across the entire range of the curve

Elasticity of Demand Curves Price Quantity Unit Elasticity

Constant elasticity

Elasticity

D P*P* Infinitely Elastic Demand

Elasticities  Would you expect transportation to be elastic or inelastic?  How would elasticities vary in the short and long runs?

Gasoline demand in the short run and the long run D SR D LR People tend to drive smaller and more fuel efficient cars in the long-run Gasoline

Supply Curves  The relationship between price and the quantity produced  Characteristics of Supply Supply is a relationship but quantity supplied refers to a specific point along a supply curve Supply defines what a producer would actually do, not what he or she would like to do. Quantity supplied is always measured in time units. Supply curve for normal goods slope upward and to the right

Supply – Demand analysis  The study of supply – demand relationships with respect to change  Problem – How do you know if you identified two points on a supply or a demand curve  Analysis of supply and demand can be done with either time series or cross sectional data D D S S’S’ S’S’ D’ D D S S

Time series  Examining a phenomena's change through time  Changes in prices related to a good’s demand. For example, price of gasoline is related to demand for new cars (demand shift)  Changes in prices of related to a goods supply. For example, better opening a parralle route would reduce congestion and, hence, change shift supply (supply shift)  Changes in income levels (demand Shift)

Cross-Section Analysis  Changes in the real price of a good. For example, changes in the real price of service as locations from different distances are examined (supply shift)  Changes in the real prices of alternative good. For example, the quantity of auto travel demand relative the available of transit (demand shift)  Change in income levels of cross sections (demand shift)

Equilibrium Markets q1 p1 q2 p2 q3 p3

Network Equilibrium The paths through the network represent an equilibration between supply and demand

Wardrop’s principles  Wardrop's first principle states: The journey times in all routes actually used are equal and less than those which would be experienced by a single vehicle on any unused route. Each user non-cooperatively seeks to minimize his cost of transportation. The traffic flows that satisfy this principle are usually referred to as "user equilibrium" (UE) flows, since each user chooses the route that is the best. Specifically, a user-optimized equilibrium is reached when no user may lower his transportation cost through unilateral action.

Wardrop’s principles  Wardrop's second principle states: At equilibrium the average journey time is minimum. This implies that each user behaves cooperatively in choosing his own route to ensure the most efficient use of the whole system. Traffic flows satisfying Wardrop's second principle are generally deemed "system optimal" (SO).

Marginal Quantities Q P QPTRARMR

Total Revenue

p q 10 5 AR MR Average quantity is falling the marginal quantity is below the average. Average quantity is rising the marginal quantity is above the average Quantity.