1. 21/09/2015 Page 1© Institute of Transport Economics The mistaken belief in the incentives generated by cost-benefit analysis Scientific research on road safety management Workshop Haarlem, November 16 and 17, 2009 Rune Elvik, Institute of Transport Economics (re@toi.no)

2. 21/09/2015 © Institute of Transport EconomicsPage 2 Elements of road safety management systems  A well-functioning system for accident data collection  Systems for monitoring safety and identifying problems  Long-term visions or ideals for improving safety  Quantified targets and targeted road safety programmes  Formal tools for priority setting of road safety measures  Funding and budget allocation mechanisms  Formalised government responsibility for safety  Research and development

3. Formal analysis for priority setting  Cost-effectiveness analysis  Effects are stated in ”natural” units (number of accidents)  Objective is to identify how to get the largest effect for the least expenditure of resources  Only safety effects are considered  Multi-criteria analysis  Considers multiple objectives, not just safety  All objectives are stated in ”natural” units  Weights are assigned to objectives, but not in monetary terms  Cost-benefit analysis  Considers multiple objectives, all stated in monetary terms  Is based on normative economic welfare theory 21/09/2015 © Institute of Transport EconomicsPage 3

4. The main problem of the study  Does cost-benefit analysis generate incentives for implementing cost-effective road safety measures that would not have existed if a cost-benefit analysis had not been made and found the measures to be cost-effective?  Or, in other words:  Is a cost-benefit analysis showing that a measure is cost- effective sufficient to ensure that it is implemented?  If not, how can incentives be strengthened?  Cost-effective = benefits are greater than costs 21/09/2015 © Institute of Transport EconomicsPage 4

5. 21/09/2015 © Institute of Transport EconomicsPage 5 Basic rules of the game 1.Respect for consumer sovereignty  The choices consumers make with respect to how they spend their income are respected and treated as data 2.Valuation of non-market goods in terms of willingness-to- pay  The value of a commodity is reflected in the maximum amount of money we are willing to pay for obtaining it 3.Maximising welfare as the objective of analysis  The criterion for welfare maximisation is that a project produces a potential Pareto improvement (winners may compensate losers) 4.Neutrality with respect to the distribution of costs and benefits  It does not matter who gets the benefits or who pays the costs

6. 6 Components of valuation Total value of safety Direct costs of accidents or injuries Medical treatment Property damage Adminis- trative costs Loss of productive capacity TemporaryPermanent Loss of welfare Own loss Loss for others (family, etc)

7. 21/09/2015 © Institute of Transport EconomicsPage 7 Willingness-to-pay for safety  Refers to the valuation of changes in risk  Values are elicited ex ante (ex post valuation makes no sense for the risk of death)  Values are stated as willingness-to-pay for specific changes in risk  Specific WTP is aggregated to the value of statistical life

8. 8 Value of preventing a fatality - Norway Total value (100%) Direct costs (0.7%) Medical treatment (0%) Property damage (0.4%) Adminis- trative (0.3%) Loss of productive capacity (20.2%) Temporary Permanent (20.2%) Loss of welfare (79.1%) Own loss (70.3%) Loss for others (8.8%)

9. The nature of valuation components Main componentObservabilityMarket transactions Direct costs (medical, vehicle repair, administration) In principle observableYes, mostly Indirect costs (lost productive capacity) Partly observable, partly not Yes, for short absence; no for deaths Willingness-to-pay (gain in welfare) Purely hypotheticalNo, only inferred in analyses 21/09/2015 © Institute of Transport EconomicsPage 9

10. Implications  Most of the monetary benefits of improving safety are purely hypothetical – they do not show up anywhere in the form of increased income or profits  This does not mean that these benefits are not real – just that they are not converted to streams of income by means of market transactions  To put it elliptically:  What would happen if nobody was killed in traffic?  Nobody would notice the difference 21/09/2015 © Institute of Transport EconomicsPage 10

11. Incentives  The prospect of gaining something by choosing an option from a set of alternatives  Gains can be almost anything: higher income, more power, greater happiness, etc  The prospect of making the gain must be real – it must have a high probability if the favoured option is chosen  In other words: incentives are embedded in power structures  Incentives can only motivate if you have the power to bring about the outcome that produces the gain 21/09/2015 © Institute of Transport EconomicsPage 11

12. Power  The ability of an actor to bring about the outcomes that bring him rewards  Power in this sense can be modelled as the product of interest and control:  Power = Interest x Control  Interest: the strength of an incentive – the size of the difference in utility between different options for choice  Control: the degree of influence on the probability that the most wanted outcome will occur  Stakeholder: someone who takes an interest in something and therefore seeks opportunities to influence it 21/09/2015 © Institute of Transport EconomicsPage 12

13. Potential stakeholders in road safety  Households  Business firms  The health sector  Car manufacturers  Road authorities  Households, business firms and the health sector have almost no stake in road safety and cannot be expected to do anything to improve it – incentives are very weak and cost-benefit analyses provide no additional incentives to act 21/09/2015 © Institute of Transport EconomicsPage 13

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15. Incentives facing car manufacturers  Enhanced safety will be provided if it sells  Safety has improved greatly in recent years and has become a more important selling point than before  Now offered:  Electronic stability control  Side-impact airbags  Enhanced neck injury protection (headrests and seat construction)  Not offered (unless made mandatory):  Intelligent speed adaptation  Seat belt ignition interlocks  Alcohol ignition interlocks 21/09/2015 © Institute of Transport EconomicsPage 15

16. Incentives facing road authorities  There are no strong incentives for improving road safety  Despite this, the road system has been made safer in all highly motorised countries the past 40-50 years  Why?  Part of the gains in safety have been a by-product of investments intended mainly to increase capacity and mobility  Part of the gains have been made as a result of unpremeditated discoveries – ”learning-by-doing”  Part of the gains have been made because politicians have instructed road authorities to improve safety 21/09/2015 © Institute of Transport EconomicsPage 16

17. Strengthening incentives  The benefits of improving road safety must be converted into real monetary gains – a profit to be made; costs to be saved; an income to be raised  In principle, this is possible by introducing a comprehensive road pricing system in which road users pay the full marginal costs of road use  Technology for introducing such a system of road pricing is rapidly developing and becoming mature  All external impacts of road use can be internalised by means of road pricing 21/09/2015 © Institute of Transport EconomicsPage 17

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19. Pricing road user behaviour  Technology makes it possible to record:  Route choice (which road you are driving on)  Speed  Use of daytime running lights  Following distances  Use of indicators  Impact speed in case of an accident  This can be done by means of a driving computer and a GIS-based road map system  The cost of these systems is rapidly coming down, making road pricing more feasible 21/09/2015 © Institute of Transport EconomicsPage 19

20. Potential problems  Many road users feel that they are already paying for the use of roads in terms of taxes on vehicles and fuel  A detailed monitoring of behaviour can be felt as an invasion of privacy  There will be significant costs in starting up the system; there is likely to be resistance to this as many road users will see no benefit in the system  The prices to be charged are not known very well; fixing prices would have be done by trial-and-error  Prices higher than the marginal costs would need to be charged to cover the fixed costs of the road system 21/09/2015 © Institute of Transport EconomicsPage 20

21. Concluding remarks  Cost-benefit analyses show that many road safety measures are cost-effective  Some of these measures are nevertheless not implemented  Opportunities for cost-effective improvement of road safety are not made use of  The benefits of improving road safety are mostly abstract gains in welfare that are not converted to a monetary gain  Incentives for improving road safety are therefore not necessarily strengthened by performing cost-benefit analysis  Households, business firms and the health sector face weak incentives to improve road safety 21/09/2015 © Institute of Transport EconomicsPage 21

22. More concluding remarks  For both households and business firms, social dilemmas are an issue – what is good from a societal perspective is not always good from a private perspective  Car manufacturers will provide for safety if it makes for good business – otherwise not  Road authorities have acted to improve road safety, but progress could be faster if incentives were stronger  A road pricing system can generate stronger incentives, but there are many problems to overcome before it can be introduced 21/09/2015 © Institute of Transport EconomicsPage 22