Transportation economics and project evaluation
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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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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

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

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 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

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 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

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 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

    Time

    Example project selection

    Project 1

    Reconstruction

    Performance level

    Maintenance Treatment

    Project 2

    Performance level

    Each assumes its ongoing cost of maintenance


    Project design selection criteria

    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

    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

    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

    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

    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

    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

    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

    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

    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

    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

    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

    Example 1

    • Was Ford right or wrong?

    • Why?


    Example 2 right turn on red

    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


    Comparison of two examples

    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

    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

    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

    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

    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

    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

    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

    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

    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

    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


    What are states doing 1993 survey

    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

    Factors Causing Crashes

    • Driver

    • Vehicle

    • Roadway

    • Environment


    Economic cost of crashes

    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

    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 frequency1

    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


    Fatal crash trends

    Fatal Crash Trends

    Source – FHWA Crash Facts Book


    Crash rate trend

    Crash Rate Trend

    Source – FHWA Crash Facts Book


    Age distribution of people killed

    Age Distribution of People Killed

    Source – FHWA Crash Facts Book


    Fatality rate by age

    Fatality Rate by Age


    Iowa crashes 2000

    Iowa Crashes (2000)

    • 445 fatalities

    • 100 had BAC > 0.1

    • 63,371 crashes

    • 35,974 injuries


    Iowa fatal crash trends

    Iowa Fatal Crash Trends


    Crash rate calculation

    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)


    Crash rate example

    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


    Severity

    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

    Crash Trend

    Mn/DOT Traffic Safety Fundamentals Handbook


    Fatality rates in upper midwest

    Fatality Rates in Upper Midwest

    Mn/DOT Traffic Safety Fundamentals Handbook


    Location of crashes

    Location of Crashes

    Mn/DOT Traffic Safety Fundamentals Handbook


    Crash rates by functional class

    Crash Rates by Functional Class

    Mn/DOT Traffic Safety Fundamentals Handbook


    Crash rates by design standard

    Crash Rates by Design Standard

    Mn/DOT Traffic Safety Fundamentals Handbook


    Crash frequency on mn expressways

    Crash Frequency on Mn Expressways


    Crash frequency on iowa expressways

    Crash Frequency on Iowa Expressways


    Crash type distribution

    Crash Type Distribution

    Mn/DOT Traffic Safety Fundamentals Handbook


    Crash rate per accesses

    Crash Rate per Accesses

    Mn/DOT Traffic Safety Fundamentals Handbook


    Crash rates by intersection control

    Crash Rates by Intersection Control

    Mn/DOT Traffic Safety Fundamentals Handbook


    Crash type by intersection

    Crash Type by Intersection

    Mn/DOT Traffic Safety Fundamentals Handbook


    Improving safety

    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

    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

    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

    Markets – Demand-Supply Relationships

    • Demand Curves – The relationship between price and quantity consumed.

    Price

    Quantity


    Characteristics of demand

    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

    Market demand

    Market Demand

    Individual 1

    Individual 2

    P1

    P2

    Q1

    Q2

    Q3

    Q4

    Q1+Q3

    Q2+Q4

    2. Market Demand consists of two or more demanders of a good


    Characteristics of demand1

    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

    Arc Elasticity

    $6.00

    $4.00

    12

    18

    Point Elasticity


    Properties of elasticities

    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

    Elasticity of Demand Curves

    Price

    Unit Elasticity

    Quantity


    Constant elasticity

    Constant elasticity


    Elasticity

    Elasticity


    Elasticity1

    D

    P*

    Elasticity

    Infinitely Elastic Demand


    Elasticities

    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

    DSR

    People tend to

    drive smaller and

    more fuel efficient

    cars in the long-run

    DLR

    Gasoline demand in the short run and the long run

    Gasoline


    Supply curves

    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

    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

    S

    D’

    S

    S’

    D

    D’

    D

    S’

    S

    D


    Time series

    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

    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

    Equilibrium Markets

    p1

    p3

    p2

    q2

    q3

    q1


    Network equilibrium

    Network Equilibrium

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


    Wardrop s principles

    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 principles1

    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

    Marginal Quantities

    P

    10

    1

    1

    Q

    10


    Transportation economics and project evaluation

    25

    Total Revenue

    0

    10

    0

    5


    Transportation economics and project evaluation

    p

    10

    AR

    MR

    5

    10

    q

    Average quantity is falling the marginal quantity is below the average.

    Average quantity is rising the marginal quantity is above the average

    Quantity.


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