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The mistaken belief in the incentives generated by cost-benefit analysisScientific research on road safety management

Workshop Haarlem, November 16 and 17, 2009

Rune Elvik, Institute of Transport Economics (re@toi.no)

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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

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

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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

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Basic rules of the game1. 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

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Components of valuation

Total valueof safety

Direct costsof accidents or injuries

Loss ofproductive capacity

Loss ofwelfare

Medicaltreatment

Adminis-trativecosts

Propertydamage

Temporary Permanent Own lossLoss forothers

(family, etc)

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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

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Value of preventing a fatality - Norway

Total value(100%)

Direct costs(0.7%)

Loss ofproductive capacity(20.2%)

Loss ofwelfare(79.1%)

Medicaltreatment

(0%)

Adminis-trative(0.3%)

Propertydamage(0.4%)

TemporaryPermanent

(20.2%)Own loss(70.3%)

Loss forothers (8.8%)

The nature of valuation components

Main component Observability Market transactions

Direct costs (medical, vehicle repair, administration)

In principle observable Yes, mostly

Indirect costs (lost productive capacity)

Partly observable, partly not

Yes, for short absence; no for deaths

Willingness-to-pay (gain in welfare)

Purely hypothetical No, only inferred in analyses

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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

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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

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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

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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

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-50000

-40000

-30000

-20000

-10000

0

10000

20000

30000

40000

Accident cost savings

Costs of added travel

time

Lower vehicle operating

costs

Environmental benefits

Total benefits Installation costs

Annual running costs

Total costs

Benefits and costs of ISA from two perspectives

Societal perspective

Societal perspective

Driver perspective

Driver perspective

Benefit-cost ratio = 2.23

Net benefits are negative

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

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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

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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

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0.45

0.97

1.76

1.99

0

0.5

1

1.5

2

2.5

Motorway 100 km/h Two lane road 80 km/h Urban main road small city Urban main road major city

Basi

c co

st ra

te (N

OK

per k

ilom

etre

of d

rivi

ng)

Type of road (examples)

Basic cost rates per kilometre of driving in road pricing system

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

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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

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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

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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

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