VII.  COST EFFECTIVENESS AND BENEFIT-COST ANALYSES

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A.  Costs Effectiveness Analysis

This section combines costs and benefits to provide a comparison of the estimated injuries and lives saved per net cost. Vehicle costs occur when the vehicle is purchased, but the maintenance costs, opportunity costs of refilling tires, safety benefits, and property damage benefits and travel delay benefits accrue over the lifetime of the vehicle. Maintenance costs, opportunity costs, and all of the benefits must therefore be discounted to express their present value and put them on a common basis with vehicle costs.

In some instances, costs may exceed economic benefits, and in these cases, it is necessary to derive a net cost per equivalent fatality prevented. An equivalent fatality is defined as the sum of: (1) fatalities and (2) nonfatal injuries prevented converted into fatality equivalents. This conversion is accomplished using the relative values of fatalities and injuries measured using a "willingness to pay" approach. This approach measures individuals’ willingness to pay to avoid the risk of death or injury based on societal behavioral measures, such as pay differentials for more risky jobs.

Table VII-1 presents the relative estimated rational investment level to prevent one injury, by maximum injury severity. Thus, one MAIS 1 injury is equivalent to 0.0031 fatalities. The data represent average costs for crash victims of all ages. The Abbreviated Injury Scale (AIS) is an anatomically based system that classifies individual injuries by body region on a six point ordinal scale of risk to life. The AIS does not assess the combined effects of multiple injuries. The maximum AIS (MAIS) is the highest single AIS code for an occupant with multiple injuries.

* Includes the economic cost components and valuation for reduced quality of life
Source: "The Economic Impact of Motor Vehicle Crashes, 2000", NHTSA, May 2002, DOT HS 809 446..

Table VII-2 shows the estimated equivalent fatalities for the different Compliance Options. The injuries from Chapter V are weighted by the corresponding values in Table VII-1, added to the fatalities, and then summed.

Net Costs

The average vehicle costs are estimated to be $69.89 per vehicle for Compliance Option 1, $66.08 for Compliance Option 2, and $48.44 for Compliance Option 3. Multiplying these by 17 million vehicles results in $1,188 million for Compliance Option 1, $1,123 for Compliance Option 2, and $823 million for Compliance Option 3. Maintenance costs and opportunity costs for refilling tires are added to these costs and then offset somewhat by a reduction in costs for fuel economy, tread wear, property damage and travel delay (See Table VII-3).

The net costs and total annual costs are shown in Tables VII-3 and VII-4.

*  Maintenance costs range from a battery-less TPMS to a TPMS with 4 batteries for Compliance Options 1 and 2, and 2 batteries for Compliance Option 3.

*  Maintenance costs range from a battery-less TPMS to a TPMS with 4 batteries for Compliance Options 1 and 2, and 2 batteries for Compliance Option 3.

*  Maintenance costs range from a battery-less TPMS to a TPMS with 4 batteries for Compliance Options 1 and 2, and 2 batteries for Compliance Option 3.

* Maintenance costs range from a battery-less TPMS to a TPMS with 4 batteries for Compliance Options 1 and 2, and 2 batteries for Compliance Option 3.

One of the conclusions from this analysis is that Compliance Option 1 with the continuous display capability has equivalent or lower net costs than Compliance Option 2 (just providing a warning signal). This occurs because the fuel savings and tread wear savings are equivalent to or more than the cost of the continuous display.

Net Cost (at a 3% discount rate)/Equivalent Fatality Before Discounting Safety Benefits

Opt. 1    $734 to $1,685 mil./250 equivalent fatalities =  $2.9 to $6.4 million per equivalent life

Opt. 2    $753 to $1,704 mil./245 equivalent fatalities =  $3.1 to $6.7 million per equivalent life

Opt. 3    $453 to $1,086 mil./245 equivalent fatalities =  $1.9 to $4.3 million per equivalent life 

Net Cost (at a 7% discount rate)/Equivalent Fatality Before Discounting Safety Benefits

Opt. 1    $782 to $1,470 mil./250 equivalent fatalities =  $3.0 to $5.6 million per equivalent life

Opt. 2    $791 to $1,479 mil./245 equivalent fatalities =  $3.1 to $5.8 million per equivalent life

Opt. 3    $491 to $949 mil./245 equivalent fatalities =  $1.9 to $3.7 million per equivalent life 

Appendix V of the "Regulatory Program of the United States Government", April 1, 1990 - March 31, 1991, sets out guidance for regulatory impact analyses. One of the guidelines deals with discounting the monetary values of benefits and costs occurring in different years to their present value so that they are comparable. The agency performed a cost-effectiveness analysis resulting in an estimate of the cost per equivalent life saved, as shown on the previous pages. The guidelines state, "An attempt should be made to quantify all potential real incremental benefits to society in monetary terms of the maximum extent possible." For the purposes of the cost-effectiveness analysis, the Office of Management and Budget (OMB) has requested that the agency compound costs or discount the benefits to account for the different points in time that they occur.

There is general agreement within the economic community that the appropriate basis for determining discount rates is the marginal opportunity costs of lost or displaced funds. When these funds involve capital investment, the marginal, real rate of return on capital must be considered. However, when these funds represent lost consumption, the appropriate measure is the rate at which society is willing to trade-off future for current consumption. This is referred to as the "social rate of time preference," and it is generally assumed that the consumption rate of interest, i.e., the real, after-tax rate of return on widely available savings instruments or investment opportunities, is the appropriate measure of its value.

Estimates of the social rate of time preference have been made by a number of authors. Robert Lind ^[36] estimated that the social rate of time preference is between zero and 6 percent, reflecting the rates of return on Treasury bills and stock market portfolios. Kolb and Sheraga ^[37] put the rate at between one and five percent, based on returns to stocks and three-month Treasury bills. Moore and Viscusi ^[38] calculated a two percent real time rate of time preference for health, which they characterize as being consistent with financial market rates for the period covered by their study. Moore and Viscusi's estimate was derived by estimating the implicit discount rate for deferred health benefits exhibited by workers in their choice of job risk.

OMB Circular A-4 recommends agencies use both 3 percent and 7 percent as the "social rate of time preference".

Safety benefits can occur at any time during the vehicle's lifetime. For this analysis, the agency assumes that the distribution of weighted yearly vehicle miles traveled are appropriate proxy measures for the distribution of such crashes over the vehicle's lifetime. Multiplying the percent of a vehicle's total lifetime mileage that occurs in each year by the discount factor and summing these percentages over the 20 or 25 years of the vehicle's operating life, results in the following multipliers for the average passenger car and light truck as shown in Table VII-4. These values are multiplied by the equivalent lives saved to determine their present value (e.g., in Table VII-5 at 3%, 250 x .8233 = 206). The net costs per equivalent life saved for passenger cars and light trucks are then recomputed and shown in Table VII-6 using the annual net cost figures from Table VII-4a for 17 million vehicles and the discounted equivalent lives saved from Table VII-5. (e.g., for the battery-less TPMS estimate, Compliance Option 1 @ 3 percent discount rate; $734 million/206 equivalent lives saved = $3.6 million per life saved).

*  The range represents battery-less TPMS to a TPMS with batteries

The results in Table VII-6 show that the cost per equivalent life saved for the battery-less TPMS range from $2.3 million to $3.7 million at a 3% discount rate and from $2.9 million to $4.7 million at a 7% discount rate. For a TPMS with batteries, the cost per equivalent life saved range from $4.6 million to $7.3 million at a 3% discount rate and from $4.9 million to $7.8 million at a 7% discount rate. Thus, a battery-less TPMS is more cost effective than a TPMS with a battery.




B.  Benefit-Cost Analysis

Effective January 1, 2004, OMB Circular A-4 requires that analyses performed in support of proposed rules must include both cost effectiveness and benefit-cost analysis. Benefit-cost analysis differs from cost effectiveness analysis in that it requires that benefits be assigned a monetary value, and that this value be compared to the monetary value of costs to derive a net benefit. In valuing reductions in premature fatalities, we used a value of $3.5 million per statistical life. The most recent study relating to the cost of crashes published by NHTSA ^[39], as well as the most current DOT guidance on valuing fatalities ^[40], indicate a value consistent with $3.5 million. This value represents an updated version of a meta-analysis of studies that were conducted prior to 1993. More recent studies indicate that higher values may be justified. ^[41]

When accounting for the benefits of safety measures, cost savings not included in value of life measurements must also be accounted for. Value of life measurements inherently include a value for lost quality of life plus a valuation of lost material consumption that is represented by measuring consumers after-tax lost productivity. In addition to these factors, preventing a motor vehicle fatality will reduce costs for medical care, emergency services, insurance administrative costs, workplace costs, and legal costs. If the countermeasure is one that also prevents a crash from occurring, property damage and travel delay would be prevented as well. The sum of both value of life and economic cost impacts is referred to as the comprehensive cost savings from reducing fatalities.

The countermeasures that result from the TPMS proposal relate to crash-avoidance, and thus involve property damage or travel delay. The 2002 NHTSA report cited above estimates that the comprehensive cost savings from preventing a fatality for crash-avoidance countermeasures was $3,366,388 in 2000 economics. This estimate is adjusted for inflation to the 2001 cost level used in this report. Based on the CPI ALL Items index (177.1/172.2), this would become $3,462,180. The basis for the benefit-cost analyses will thus be $3.5 million.

Total benefits from injuries and fatalities reduced are derived by multiplying the value of life by the equivalent lives saved. The net benefits are derived by subtracting total net costs from the total benefits, as shown in Table VII-7. Positive Net Benefits indicate that Benefits valued at $3.5 million per equivalent life are higher than Net Costs. Negative Net Benefits indicate that Benefits valued at $3.5 million per equivalent life are lower than Net Costs.




Table VII-7
Net Benefits with a Value of $3.5M per Statistical Life*
(Millions of 2001 Dollars)

	3 Percent	7 Percent
Compliance Option 1	$25 to –$927 Mil.	$-174 to -$862 Mil.
Compliance Option 2	-$13 to -$965 Mil.	$-198 to -$887 Mil.
Compliance Option 3	$287 to -$346 Mil.	$102 to -$356 Mil.

* The range represents battery-less TPMS to a TPMS with batteries




C.  The Malfunction/Warning Lamp

We examined the malfunction warning lamp from a cost per equivalent life saved basis for Compliance Option 1 at the 3 percent discount rate (the other Compliance Options and the 7% discount rate would have very similar results). We estimated the cost for a separate telltale lamp and the added circuitry for the malfunction capability at $1.83 per vehicle or $31.1 million annually. The estimated cost for a combination telltale lamp and the added circuitry for the malfunction capability is estimated to be $0.25 per vehicle or $4.3 million annually.

On the benefits side, we estimate the same benefits for providing a separate telltale lamp as for providing a combination telltale lamp as the malfunction indication. The impact that a malfunction/warning lamp would have on benefits depends on what consumers do when they see such a lamp. The benefits of this proposal, safety benefits as well as tread life and fuel economy savings, are directly related to mileage. The average tread life was estimated to be 45,000 miles. The average weighted vehicle miles traveled was 126,678 miles for passenger cars and 153,319 miles for light trucks. That means that potentially 64 percent of the passenger car (1 – 45,000/126,678) and 71 percent of the light truck mileage will be driven on replacement tires. If 1 percent of the replacement tires are not compatible with TPMS designs, then a weighted average of 0.677 percent of the benefits for both passenger cars and light trucks could potentially not be obtained if consumers were not provided with a malfunction lamp or if they ignored the malfunction lamp. Assuming that a 1 percent malfunction, either because the TPMS won’t work with some replacement tires or because of another malfunction, resulted in a 0.677 percent loss in benefits, the impact on benefits would be 1 fatality (121 lives saved * 0.00677) and 58 injuries reduced, or 1.7 equivalent lives. The 0.675 percent loss in benefits will also affect the fuel savings and tread life savings. Table VII-8 shows the results of the analysis that a combination lamp would be cost effective, while a separate malfunction lamp would not be cost effective in absolute terms (the cost per equivalent life saved is about the $3.5 to $5.5 million range).

D.  Sensitivity Analysis

Above, we used a value of $3.5 million in valuing reductions in premature fatalities. In valuing reductions in fatalities, we also examined a value of $5.5 million per statistical life as a sensitivity analysis. This represents a central value consistent with a range of values from $1 to $10 million suggested by recent meta-analyses of the wage-risk value of statistical life (VSL) literature ^[42]. Table II-9 presents the net benefits using a value of $5.5 million per statistical life saved.

*  The range represents battery-less TPMS to a TPMS with batteries

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^[36] Lind, R.C., "A Primer on the Major Issues Relating to the Discount Rate for Evaluating National Energy Options," in Discounting for Time and Risks in Energy Policy, 1982, (Washington, D.C., Resources for the Future, Inc.).

^[37] J. Kolb and J.D. Sheraga, "A Suggested Approach for Discounting the Benefits and Costs of Environmental Regulations,: unpublished working papers.

^[38] Moore, M.J. and Viscusi, W.K., "Discounting Environmental Health Risks: New Evidence and Policy Implications," Journal of Environmental Economics and Management, V. 18, No. 2, March 1990, part 2 of 2.

^[39] L. Blincoe, A. Seay, E. Zaloshnja, T. Miller, E. Romano, S. Luchter, R. Spicer, (May 2002) "The Economic Impact of Motor Vehicle Crashes, 2000".  Washington D.C.: National Highway Traffic Safety Administration, DOT HS 809 446.

^[40] "Revised Departmental Guidance, Treatment of Value of Life and Injuries in Preparing Regulatory Evaluations", Memorandum from Kirk K. Van Tine, General Counsel and Linda Lawson, Acting Deputy Assistant Secretary for Transportation Policy to Assistant Secretaries and Modal Administrators, January 29, 2002.

^[41]  For example, Miller, T.R. (2000): "Variations Between Countries in Values of Statistical Life", Journal of Transport Economics and Policy, 34, 169-188.

^[42]  Mrozek, J.R. and L.O. Taylor, What determines the value of a life? A Meta Analysis, Journal of Policy Analysis and Management 21 (2), pp. 253-270.

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