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Transportation Economics and Project Evaluation

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?

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Transportation Economics and Project Evaluation

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

  2. 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

  3. 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)

  4. 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

  5. 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.

  6. 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

  7. 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?

  8. 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

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

  10. 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

  11. 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

  12. 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.

  13. 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?

  14. 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)

  15. 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

  16. 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

  17. 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

  18. 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?

  19. 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

  20. 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

  21. Example 1 • Was Ford right or wrong? • Why?

  22. 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 - 900 excess injuries - 10,300 PDO B/C = 7.3 in favor of right on red

  23. 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?

  24. 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

  25. 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

  26. 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?

  27. 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.

  28. 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

  29. 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.

  30. 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

  31. 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.

  32. Item Individual Cost Percent of Total Medical $22,095 0.66% Emergency Service $833 0.02% Market Productivity $595,358 17.69% HH Productivity $191,541 5.69% Insurance Administration $37,120 1.10% Workplace Costs $8,702 0.26% Legal Costs $102,138 3.03% Travel Delay $9,148 0.27% Property Damage $10,237 0.30% Quality of Life $2,389,179 70.97% 2000 value of human life $3,366,351 100.00% NHTSA values for injuries and fatalities

  33. 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

  34. Factors Causing Crashes • Driver • Vehicle • Roadway • Environment

  35. 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

  36. 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)

  37. National Crash Frequency • Fatal • 1.51 Per HMVM • 14.79 per 100,000 people • 19.04 per 100,000 vehicles • 22.02 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

  38. Fatal Crash Trends Source – FHWA Crash Facts Book

  39. Crash Rate Trend Source – FHWA Crash Facts Book

  40. Age Distribution of People Killed Source – FHWA Crash Facts Book

  41. Fatality Rate by Age

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

  43. Iowa Fatal Crash Trends

  44. 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) DEVnode = 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) DEVlink = Absolute value of [(Link length/0.3)x(Actual DEV)] (for road segments 0.6 miles and longer)

  45. Crash Rate Example 350 crashes over 5 years 10,000 vehicles enter the intersection daily Crash rate = = _____(350 x 106)_____ = 19.2 crashes per million vehicles (10,000) x 5 x 365

  46. 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

  47. Crash Trend Mn/DOT Traffic Safety Fundamentals Handbook

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

  49. Location of Crashes Mn/DOT Traffic Safety Fundamentals Handbook

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

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