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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

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


Example project selection

Project 1


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


Individual Cost

Percent of Total




Emergency Service



Market Productivity



HH Productivity



Insurance Administration



Workplace Costs



Legal Costs



Travel Delay



Property Damage



Quality of Life



2000 value of human life



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

iowa crashes 2000
Iowa Crashes (2000)
  • 445 fatalities
  • 100 had BAC > 0.1
  • 63,371 crashes
  • 35,974 injuries
crash rate calculation
Crash Rate Calculation
  • Accounts for volume
  • May account for vehicle miles traveled (VMT)

Crash rate =


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

  • 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 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

Pricing Unemployment

Demand Inflation

Supply Monetary 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.



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









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





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


Unit Elasticity






Infinitely Elastic Demand

  • 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


People tend to

drive smaller and

more fuel efficient

cars in the long-run


Gasoline demand in the short run and the long run


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












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)
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).


Total Revenue













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

Average quantity is rising the marginal quantity is above the average