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Civil Systems Planning Benefit/Cost Analysis

Civil Systems Planning Benefit/Cost Analysis. Scott Matthews Courses: 12-706 and 73-359 Lecture 17 - 11/6/2002. 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

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Civil Systems Planning Benefit/Cost Analysis

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  1. Civil Systems PlanningBenefit/Cost Analysis Scott Matthews Courses: 12-706 and 73-359 Lecture 17 - 11/6/2002

  2. 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 12-706 and 73-359

  3. Economic valuations of life • Miller (n=29) $3 M in 1999 USD, surveyed • Wage risk premium method • WTP for safety measures • Behavioral decisions (e.g. seat belt use) • Foregone future earnings • Contingent valuation 12-706 and 73-359

  4. Contingent Valuation • Analysis method used when there is no observable market • Example: water quality at national parks • Asks questions to population • Is a last resort option! • Called ‘contingent’ since you never really pay • Valuing use non-controversial • Valuing ‘non-use’ VERY controversial 12-706 and 73-359

  5. Example • Asked for valuations of a certain good • Then estimate overall WTP for it - similar to travel time demand functions • Extrapolated to entire population • Assumes random sample! 12-706 and 73-359

  6. Criticisms of CV • Extrapolation of ‘all CV studies’ to average consumer would take over their budget • Normal statistical problems (sampling, non-response, biases, etc.) • Surveying opinions is imprecise • Problems tend to be complicated 12-706 and 73-359

  7. WTP versus WTA • Economics implies that WTP should be equal to ‘willingness to accept’ loss • Turns out people want MUCH MORE in compensation for losing something • WTA is factor of 4-15 higher than WTP! • Also see discrepancy shrink with experience • WTP formats should be used in CVs • Only can compare amongst individuals 12-706 and 73-359

  8. Measuring Lives Saved • Life years (prevented fatalities) not equal • Qualitative and quantitative issue • Need to consider tradeoffs • Simple example from text • 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 12-706 and 73-359

  9. Simple Example 12-706 and 73-359

  10. 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 A and B • But which of A or B is better? • We all understand difference in years • Come up with an index of health status 12-706 and 73-359

  11. Health Status Index Death Severely Disabled Moderately Disabled Minimally Disabled Health • Derived from asking experts • But this says nothing about tradeoff! • Can perform tradeoff survey • Value of “shorter Y, higher H” vs. opposite 0 0.15 0.47 0.92 1 12-706 and 73-359

  12. Methods • Health Rating method (see above) • Time tradeoff method • Standard gamble method • Discounting life years 12-706 and 73-359

  13. Risk Analysis • Study of the interactions between decision making, judgment, and nature • Evidence : cost-effectiveness of risk reduction opportunities varied widely - orders of magnitude • Economic efficiency problems 12-706 and 73-359

  14. Cost-Effectiveness of Life-Saving Interventions • From “500 Life-saving Interventions and Their Cost-Effectiveness”, Risk Analysis, Vol. 15, No. 3, 1995. • ‘References’ (eg #1127) are all other studies • Model: • Estimate costs of intervention vs. a baseline • Discount all costs • Estimate lives and life-years saved • Discount life years saved • CE = CI-CB/EI-EB 12-706 and 73-359

  15. Specific (Sample) Example • From p.373 - Ref no. 1127 • Rear outboard lap/shoulder belts in all (vs. 96%) of cars • Intervention: require all cars made after 9/1/90 to have belts - 96% already had them • Thus costs only apply to remaining 4% of cars • Target population: occupants over age 4 • Others would be in child safety seats • What would costs be? 12-706 and 73-359

  16. Example (cont) • 1986 Costs (from study): $6 cost per seat • Plus added fuel costs (due to increased weight) = total $791,000 over life of cars • Effectiveness: expect 23 lives saved during 8.4 year lifetime of cars • But 95.8% already exist, thus only 0.966 lives • Or 0.115 lives per year (of use of car) • But these lives saved do not occur all in year 0 - they are spread out over 8.4 years. We thus need to discount the effectiveness of lives saved per year into ‘year 0’ lives.. 12-706 and 73-359

  17. Cost per life saved • With a 5% discount rate, the ‘present value’ of 0.115 lives for 9 years = 0.817 • This is basically an annuity factor • So cost/life saved = $791,000/0.817 • Or $967,700 per life (in “$1986/1986 lives”) • Using CPI: 145.8/109.6 -> $1,287,326 in $1993 • But this tells us only the cost per life saved • We realistically care more about quality of life, which suggests using a quality index, e.g. life-years saved. 12-706 and 73-359

  18. Cost per life-year saved • Assume average age of fatality in car accident was 35 years • Life expectancy tables suggest a 35 year old person would on average live to age 77 • Thus ‘42’ life years saved per fatality avoided • 1 life year for 42 years @5%= 17.42 years • $1993 cost/life-year = $1,287,326/17.42 • 2 sig. figures: ~$74,000 as in paper 12-706 and 73-359

  19. Overall Results • Some had < $0 cost, some cost > $10B • Median $42k per life year saved • Some policies implemented, some only studied • Variation of 11 orders of magnitude! • Some maximums - $20 billion for benzene emissions control at tire factories • $100 billion for chloroform standards at paper mills 12-706 and 73-359

  20. Comparisons 12-706 and 73-359

  21. Agency Comparisons • $1993 Costs per life year saved for agencies: • FAA (Aviation): $23,000 • CPSC (Consumer Products): $68,000 • NHTSA (Highways): $78,000 • OSHA (Worker Safety): $88,000 • EPA (Environment): $7,600,000! • Are there underlying causes for range? Hint: are we comparing apples and oranges? 12-706 and 73-359

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