1. 1 Civil Systems Planning Benefit/Cost Analysis Scott Matthews Courses: 12-706 and 73-359 Lecture 21 - 11/22/2004

2. 12-706 and 73-3592 Intro  So far, we have considered externality problems in one of 2 ways:  1) By monetizing externality and including it explicitly as part of BCA  2) Finding cost, dividing by measured effectiveness (in non-monetary terms)  While Option 2 is preferred, it is only relevant with a single effectiveness

3. 12-706 and 73-3593 MAIS Table - Used for QALY Conversions Comprehensive Fatality / Injury Values Injury Severity1994 Relative Value MAIS1.0038 MAIS2.0468 MAIS3.1655 MAIS4.4182 MAIS5.8791 Fatality1.0

4. 12-706 and 73-3594 Single vs. Multiple Effectiveness  Recall earlier examples:  Cost per life saved  Cost per ton of pollution  When discussing “500 Interventions” paper, talked about environmental regs  Had mortality and morbidity benefits  Very common to have multiple benefits/effectiveness  Under option 1 above, we would just multiply by $/life and $/injury values..  But recall that we prefer NOT to monetize and instead find CE/EC values to compare to others

5. 12-706 and 73-3595 Multiple Effectiveness  In Option 2, its not relevant to simply divide total costs (TC) by # deaths, # injuries, e.g. CE 1 = TC/death, CE 2 = TC/injury  Why?  Misrepresents costs of each effectiveness  Instead, we need a method to allocate the costs (or to separate the benefits) so that we have CE ratios relevant to each effectiveness measure

6. 12-706 and 73-3596 Options for Better Method  Use “primary target” as effectiveness  Allocate all costs to it (basically what we’ve been doing)  Add effectiveness measures together  E.g., tons of pollution  Is as ridiculous as it sounds (tons not equal, lives not equal to injuries)

7. 12-706 and 73-3597 Improved Method  In absence of more information or knowing better, allocate costs evenly  E.g., if 2 pollutants each gets 1/2 the cost  Easy to make slight variations if new information or insight is available  Could use our monetization values to inform this (e.g., external cost values, $/life values, etc.)

8. 12-706 and 73-3598 Recall from previous lecture

9. 12-706 and 73-3599 Another Option  For each effectiveness, subtract marginal cost/benefit values of all other measures from total cost so that only remaining costs exist for CE ratios  Again could use median $ values on previous slide to do this  Examples..