I. COST EFFECTIVENESS

This section combines costs and benefits to provide a comparison of the estimated injuries and lives saved per net cost. Costs occur when the vehicle is purchased, but the benefits accrue over the lifetime of the vehicle. 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

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

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

Table VII-2
Equivalent Fatalities

Net Costs

The average vehicle costs are estimated to be $66.33 per vehicle for Alternative 1 and $30.54 for Alternative 2. Multiplying these by 16 million vehicles results in $1,061 million for Alternative 1 and $489 million for Alternative 2. These costs are offset somewhat by reduction in costs for fuel economy and tread wear (See Table VII-3).

Table VII-3
Net Costs per Vehicle
(2001 Dollars)

For 16 million vehicles, the net costs are estimated to be $ 369 million annually for Alternative 1 and $138 million annually for Alternative 2.

Net Cost/Equivalent Fatality Before Discounting

Alternative 1   $369 mil./300 equivalent fatalities = $1.2 million per equivalent life

Alternative 2   $138 mil./184 equivalent fatalities = $0.8 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. 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 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 (300 x .8766 = 263). The net costs per equivalent life saved for passenger cars and light trucks are then recomputed and shown in Table VII-6 using the net cost figures from Table VII-3 times 16 million vehicles and the discounted equivalent lives saved from Table VII-5 (e.g., for Alternative 1 @ 2 percent discount rate; $369 million/263 equivalent lives saved = $1.4 million per life saved).

Table VII-4
Discounting Multipliers

Table VII-5
Discounting of Equivalent Lives Saved

Table VII-6
Net Costs per Discounted Equivalent Life Saved
($millions)

1. ¹Lind, 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. ²J. Kolb and J.D. Sheraga, "A Suggested Approach for Discounting the Benefits and Costs of Environmental Regulations,: unpublished working papers.

3. ³Moore, 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.