1. 1 Applications of Simulation Travel Costs Scott Matthews Courses: 12-706 / 19-702

2. 12-706 and 73-3592 Admin Issues  No Friday class this week  More on HW 4 – removing Q #17.  Grade Range on Next Slide  Need to specify take-home final plans  Week of Dec 8-12, Two timeslots?  #1: Morning of 8 th – 5pm on 10 th  #2: Morning of 10 th – 5pm on 12 th

3. HW 4 Grades  All raw scores above 74 -> 50/50  All scores below 74, scaled as % of 74  Minimum score: 15/50  Average: 35/50 12-706 and 73-3593

4. @RISK tutorial/simulations  Look how to do overlays (put multiple distributions on one graph).  Incorporating correlations next week. 12-706 and 73-3594

5. 5 Travel Costs  Time is a valuable commodity (time is $)  Arguably the most valuable  All about opportunity cost  Most major transportation/infrastructure projects built to ‘save travel costs’  Need to tradeoff project costs with benefits  Ex: new highway that shortens commutes  Differences between ‘travel’ and ‘waiting’  Waiting time disutility might be orders of magnitude higher than just ‘travel disutility’  Why? Travelling itself might be fun

6. 12-706 and 73-3596 Valuation: Travel Cost Method  Estimate economic use values associated with ecosystems or sites that are used for recreation  changes in access costs for a recreational site  elimination of an existing recreational site  addition of a new recreational site  changes in environmental quality  www.ecosystemvaluation.org/travel_costs.htm

7. 12-706 and 73-3597 Travel Cost Method  Basic premise - time and travel cost expenses incurred to visit a site represent the “price” of access to the site.  Thus, peoples’ WTP to visit the site can be estimated based on the number of trips that they make at different travel costs.  This is analogous to estimating peoples’ WTP for a marketed good based on the quantity demanded at different prices.

8. 12-706 and 73-3598 Example Case  A site used mainly for recreational fishing is threatened by development.  Pollution and other impacts from this development could destroy the fish habitat  Resulting in a serious decline in, or total loss of, the site’s ability to provide recreational fishing services.  Resource agency staff want to determine the value of programs or actions to protect fish habitat at the site.

9. 12-706 and 73-3599 Why Use Travel Cost?  Site is primarily valuable to people as a recreational site. There are no endangered species or other highly unique qualities that would make non-use values for the site significant.  The expenditures for projects to protect the site are relatively low. Thus, using a relatively inexpensive method like travel cost makes the most sense.  Relatively simple compared to other methods

10. 12-706 and 73-35910 Options for Method  A simple zonal travel cost approach, using mostly secondary data, with some simple data collected from visitors.  An individual travel cost approach, using a more detailed survey of visitors.  A random utility approach using survey and other data, and more complicated statistical techniques.

11. 12-706 and 73-35911 Zonal Method  Simplest approach, estimates a value for recreational services of the site as a whole. Cannot easily be used to value a change in quality of recreation for a site  Collect info. on number of visits to site from different distances. Calculate number of visits “purchased” at different “prices.”  Used to construct demand function for site, estimate consumer surplus for recreational services of the site.

12. 12-706 and 73-35912 Zonal Method Steps  1. define set of zones around site. May be defined by concentric circles around the site, or by geographic divisions, such as metropolitan areas or counties surrounding the site  2. collect info. on number of visitors from each zone, and the number of visits made in the last year.  3. calculate the visitation rates per 1000 population in each zone. This is simply the total visits per year from the zone, divided by the zone’s population in thousands.

13. 12-706 and 73-35913 Sample Data

14. 12-706 and 73-35914 Estimating Costs z 4. calculate average round-trip travel distance and travel time to site for each zone. y Assume Zone 0 has zero travel distance and time. y Use average cost per mile and per hour of travel time, to calculate travel cost per trip. y Standard cost per mile is $0.30. The cost of time is from average hourly wage. y Assume that it is $9/hour, or $.15/minute, for all zones, although in practice it is likely to differ by zone.

15. 12-706 and 73-35915 Data 5. Use regression to find relationship between visits and travel costs, e.g. Visits/1000 = 330 – 7.755*(Travel Cost) “a proxy for demand given the information we have”

16. 12-706 and 73-35916 Final steps  6. construct estimated demand for visits with regression. First point on demand curve is total visitors to site at current costs (with no entry fee), which is 1600 visits. Other points by estimating number of visitors with different hypothetical entrance fees (assuming that an entrance fee is valued same as travel costs). Start with $10 entrance fee. Plugging this into the estimated regression equation, V = 330 – 7.755C:

17. 12-706 and 73-35917 Demand curve zThis gives the second point on the demand curve—954 visits at an entry fee of $10. In the same way, the number of visits for increasing entry fees can be calculated:

18. 12-706 and 73-35918 Graph Consumer surplus = area under demand curve = benefits from recreational uses of site around $23,000 per year, or around $14.38 per visit ($23,000/1,600). Agency’s objective was to decide feasibility to spend money to protect this site. If actions cost less than $23,000 per year, the cost will be less than the benefits provided by the site.

19. 12-706 and 73-35919 Recreation Benefits  Value of recreation studies  ‘Values per trip’ -> ‘value per activity day’  Activity day results (Sorg and Loomis 84)  Sport fishing: $25-$100, hunting $20-$130  Camping $5-$25, Skiing $25, Boating $6-$40  Wilderness recreation $13-$75  Are there issues behind these results?

20. 12-706 and 73-35920 Value of travel time savings  Many studies seek to estimate VTTS  Can then be used easily in CBAs  Waters, 1993 (56 studies)  Many different methods used in studies  Route, speed, mode, location choices  Results as % of hourly wages not a $ amount  Mean value of 48% of wage rate (median 40)  North America: 59%/42%  Good resource for studies like this: www.vtpi.org

21. 12-706 and 73-35921 Government Analyses  DOT (1997): Use % of wage rates for local/intercity and personal/business travel  These are the values we will use in class Office of Secretary of Transportation, “Guidance for the Valuation of Travel Time in Economic Analysis”, US DOT, April 1997.

22. 12-706 and 73-35922 In-and-out of vehicle time

23. 12-706 and 73-35923 Income and VTTS  Income levels are important themselves  VTTS not purely proportional to income  Waters suggests ‘square root’ relation  E.g. if income increases factor 4, VTTS by 2

24. 12-706 and 73-35924 Introduction - Congestion  Congestion (i.e. highway traffic) has impacts on movement of people & goods  Leads to increased travel time and fuel costs  Long commutes -> stress -> quality of life  Impacts freight costs (higher labor costs) and thus increases costs of goods & services  http://mobility.tamu.edu/

25. 12-706 and 73-35925 Literature Review  Texas Transportation Institute’s 2005 Annual Mobility Report  http://tti.tamu.edu/documents/mobility_report_2005.pdf  20-year study to assess costs of congestion  Average daily traffic volumes  Binary congestion values  ‘Congested’ roads assumed both ways  Assumed 5% trucks all times/all roads  Assumed 1.25 persons/vehicle, $12/hour  Assumed roadway sizes for 3 classes of roads  Four different peak hour speeds (both ways)

26. 12-706 and 73-35926 Results  An admirable study at the national level  In 2003, congestion cost U.S. 3.7 billion hours of delay, 2.3 billion gallons of wasted fuel, thus $63 billion of total cost

27. 12-706 and 73-35927 Long-term effects (Tufte?) Uncongested 33% Severe 20% Heavy 14%

28. 12-706 and 73-35928 Old / Previous Results  Method changed over time..  In 1997, congestion cost U.S. 4.3 billion hours of delay, 6.6 billion gallons of wasted fuel, thus $72 billion of total cost  New Jersey wanted to validate results with its own data

29. 12-706 and 73-35929 New Jersey Method  Used New Jersey Congestion Management System (NJCMS) - 21 counties total  Hourly data! Much more info. than TTI report  For 4,000 two-direction links  Freeways principal arteries, other arteries  Detailed data on truck volumes  Average vehicle occupancy data per county, per roadway type  Detailed data on individual road sizes, etc.

30. 12-706 and 73-35930 Level of Service  Description of traffic flow (A-F)  A is best, F is worst (A-C ‘ok’, D-F not)  Peak hour travel speeds calculated  Compared to ‘free flow’ speeds  A-C classes not considered as congested  D-F congestion estimated by free-peak speed  All attempts to make specific findings on New Jersey compared to national  http://www.njit.edu/Home/congestion/

31. 12-706 and 73-35931 Definitions  Roadway Congestion Index - cars per road space, measures vehicle density  Found per urban area (compared to avgs)  > 1.0 undesirable  Travel Rate Index  Amount of extra time needed on a road peak vs. off-peak (e.g. 1.20 = 20% more)

32. 12-706 and 73-35932 Definitions (cont.)  Travel Delay - time difference between actual time and ‘zero volume’ travel time  Congestion Cost - delay and fuel costs  Fuel assumed at $1.28 per gallon  VTTS - used wage by county (100%)  Also, truck delays $2.65/mile (same as TTI)  Congestion cost per licensed driver  Took results divided by licenses  Assumed 69.2% of all residents each county

33. 12-706 and 73-35933 Details  County wages $10.83-$23.20 per hour  Found RCI for each roadway link in NJ  Aggregated by class for each county

34. 12-706 and 73-35934 RCI result: Northern counties generally higher than southern counties New York City

35. 12-706 and 73-35935 TRI result: Northern counties generally higher than southern counties

36. 12-706 and 73-35936

37. 12-706 and 73-35937 Avg annual Delay = 34 hours! Almost a work Week!

38. 12-706 and 73-35938

39. 12-706 and 73-35939 Effects  Could find annual hours of delay per driver by aggregating roadway delays  Then dividing by number of drivers  Total annual congestion cost $4.9 B  Over 5% of total of TTI study  75% for autos (190 M hours, $0.5 B fuel cost)  25% for trucks (inc. labor/operating cost)  Avg annual delay per driver = 34 hours

40. 12-706 and 73-35940

41. 12-706 and 73-35941 Future  Predicted to only get worse  Congestion costs will double by 2015  Why? We spend money on construction

42. 42 Utility  Recall: eliciting and using individual utility functions to make decisions  Is there a similar concept to help us make decisions at the social level?

43. 43 Specifics on Saving Lives  Cost-Utility Analysis  Quantity and quality of lives important  Just like discounting, lives are not equal  Back to the developing/developed example  But also: YEARS are not equal  Young lives “more important” than old  Cutting short a year of life for us vs  Cutting short a year of life for 85-year-old  Often look at ‘life years’ rather than ‘lives’ saved.. These values also get discounted

44. 44 Measuring Lives Saved  Life years (prevented fatalities) not equal  Qualitative and quantitative issue  Need to consider tradeoffs  Simple example  Status quo: no newborns survive a condition  Alt. A: 5 live, but with permanent disability  Alt. B: 2 live, but with low levels of disability  Which option (SQ, A, B) is preferable?  Assume Y increasing, H increasing  Equal costs, no relevant uncertainty

45. 45 Simple Example

46. 46 The Quality/Quantity Game  Assume “preference” for  Increased number of years lived  Increased level of health  Would your preferences be the same?  If so, SQ “dominated” by both A and B  Note different horizontal/vertical preference  But which of A or B is better?  We all understand difference in years  Need an index of health status

47. 47 Health Status Index Death 0 Severely Disabled Minimally Disabled HealthModerately Disabled 0.150.470.921  Measures utility, derived from experts  But this says nothing about tradeoff!  Can perform tradeoff survey  Value of “shorter Y, higher H” vs. opposite

48. 48 Methods  Health Rating method (see above)  Time tradeoff method  Standard gamble method  Discounting life years  Can/should we discount them?  Unlike cash values, we can’t make a decision to trade 1 year today for 10 yrs from now

49. 49 Cost-Effectiveness Testing  Generally, use when:  Considering externality effects or damages  Could be environmental, safety, etc.  Benefits able to be reduced to one dimension  Alternatives give same result - e.g. ‘reduced x’  Benefit-Cost Analysis otherwise difficult/impossible  Instead of finding NB, find “cheapest”  Want greatest bang for the buck  Find cost “per unit benefit” (e.g. lives saved)  Allows us to NOT include ‘social costs’

50. 50 Why CEA instead of CBA?  Similar to comments on MCDM  Constraints may limit ability to perform  Monetizing maybe difficult or controversial  Easy to find lives saved, hard to judge value  Monetizing can’t capture total social value or distorts its value

51. 51 The CEA ratios  CE = C/E  Equals cost “per unit of effectiveness”  e.g. $ per lives saved, tons CO2 reduced  Want to minimize CE (cheapest is best)  EC = E/C  Effectiveness per unit cost  e.g. Lives saved per dollar  Want to maximize EC  No practical difference between 2 ratios

52. 52 An Obvious Example

53. 53 Another Obvious One

54. 54 Comments on Obvious Examples  Each had 2 dominated alternatives  Could easily identify best CE/EC option  Also had fixed scale  Fixed cost scale in first  Fixed effectiveness in second

55. 55 Interesting Example

56. 56 Lessons Learned  Ratios still tend to hide results  Do not take into account scale issues  CBA might have shown Option B to be better (more lives saved)  Tend to only consider budgetary costs  CEA used with constraints?  Minimize C s.t. E > E*  Min. effectiveness level (prev slide)  Find least costly way to achieve it  Minimize CE s.t. E > E*  Generally -> higher levels of C and E!  Can have similar rules to constrain cost