VII. COST EFFECTIVENESS

This section combines costs and benefits to provide a comparison of the estimated injuries and lives saved per net cost. Tire costs occur when the tire is purchased, but benefits accrue over the lifetime of the tire. Benefits must therefore be discounted to express their present value and put them on a common basis with 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 fatalities and 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 0.0038 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.

Table VII-1

Comprehensive Fatality and Injury Relative Values
Injury Severity 1994 Relative Value* per injury
MAIS 1 .0038
MAIS 2 .0468
MAIS 3 .1655
MAIS 4 .4182
MAIS 5 .8791
Fatals 1.000
* includes the economic cost components and valuation for reduced quality of life

Source: "The Economic Cost of Motor Vehicle Crashes, 1994", NHTSA, 1996.

In Chapter IV the benefits of 27 lives saved and 667 injuries reduced were estimated. There will be additional benefits that cannot be quantified. The injuries can be divided into the following AIS levels, based on the distribution of AIS levels in the target population as follows:

Table VII-2 Distribution of Injury Benefits

AIS 1 AIS 2 AIS 3 AIS 4 AIS 5 Total
534 96 23 10 4 667

Table VII-3 shows the estimated equivalent fatalities. The injuries benefits are weighted by the corresponding values in Table VII-1, added to the fatalities, and then summed.

Table VII-2
Equivalent Fatalities

Fatality Benefits Injury Benefits Equivalent Fatalities
27 18 45

Costs

The annual tire costs are estimated to be \$282.

Net Cost/Equivalent Fatality Before Discounting

\$282 mil/45 equivalent fatalities = \$6.3 million per equivalent life

It must be emphasized that not all benefits could be quantified. The agency believes there will be other benefits that could not be quantified currently from the aging test and overloading of vehicles, that there potentially could be large benefits from the low tire inflation test, and that there will be some small benefit from the puncture resistance test and the de-beading test.

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. Historically, the agency has discounted future benefits and costs when they were monetary in nature. For example, the agency has discounted future increases in fuel consumption due to the increased weight caused by safety countermeasures, or decreases in property damage crash costs when a crash avoidance standard reduced the incidence of crashes, such as with center high-mounted stop lamps. The agency has not assigned dollar values to the reduction in fatalities and injuries, thus those benefits have not been discounted. The agency performs 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 (1) 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 (2) put the rate at between one and five percent, based on returns to stocks and three-month Treasury bills. Moore and Viscusi (3) 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.

Four different discount values are shown as a sensitivity analysis. The 2 and 4 percent rates represent different estimates of the social rate of time preference for health and consumption. The 10 percent figure was required by OMB Circular A-94, until October 29, 1992. The 7 percent figure is the current OMB requirement, which represents the marginal pretax rate of return on an average investment in the private sector in recent years.

Safety benefits can occur at any time during the tire's lifetime. For this analysis, the agency assumes that the tires are purchased in the beginning of year 5 for a typical passenger car or light truck and used for an average 45,000 miles. Table VII-3 shows the estimated distribution of miles traveled for a typical new tire purchased, and the weighted discount factor for benefits of 0.873.

Table VII-3

Year Miles Traveled Discount Factor Total Discount Factor
1 11,392 .9667 11,013
2 10,979 .9035 9,920
3 10,581 .8444 8,935
4 10,198 .7891 8,047
5 1,850 .7375 1,364
Total 45,000   39,279/45,000 = 0.873

This value (0.873) is multiplied by the equivalent lives saved to determine their present value (e.g., in Table VII-2 (45 x .873 = 39). The net costs per equivalent life saved for passenger cars and light trucks are then recomputed and are shown below.

Net Cost/Equivalent Fatality After Discounting by 7 Percent

\$282 mil/39 equivalent fatalities = \$7.2 million per equivalent life

It must be emphasized that not all benefits could be quantified. The agency believes there will be other benefits that could not be quantified currently from the aging test and overloading of vehicles, that there potentially could be large benefits from the low tire inflation test, and that there will be some small benefit from the puncture resistance test and the de-beading test.

1 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.).

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

3 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.