Economic Analysis of Transportation and Policy Decisions

This assignment delves into the economic analysis of various transportation policies. It begins by examining different criteria for decision-making, such as maximizing effectiveness at the least cost and maximizing net benefits, and determining which programs are preferable under each criterion. The assignment then explores the conditions under which these criteria are adequate measures. Further, it analyzes the assumptions governing the value of time lost driving and determines the best methods for estimating the value of time and the cost of gasoline. The assignment also assesses the reliability of different methods for estimating driving speeds and miles per gallon, and finally, it examines the value of a life saved and determines the preferable policy between a 55-mph and a 65-mph speed limit. The solution emphasizes applying economic principles to real-world policy decisions.

1. Determine the following before deciding a prescription: (a) maximize effectiveness at the
least cost; (b) maximize effectiveness at a fixed cost of $10,000; (c) achieve a fixed-
effectiveness level of 6,000 units of service at a fixed cost of $20,000; (d) maximize net
benefits, assuming that each unit of service has a market price of $10; (e) maximize the
ration of benefits to costs, assuming that each unit of service has a market price of $10.
Answer: The application of adequacy method will be beneficial at this point. A predetermined
effectiveness level supports the specific standard and the extent of the same conforms to
adequacy. The criterion that relates to the adequacy is about the anticipations of the strength
among the options concerning policy and values of the expected outcomes (Dunn, 2012).
Mentioned below are the various determinations:
a) Maximize effectiveness at the least refers to the Type II problem.
b) Maximize effectiveness at a fixed cost of $10,000 refers to the Type I problem.
c) Achieve a fixed-effectiveness level of 6000 units of service at a fixed cost of $20,000 refers to
the Type II problem.
d) Maximize net benefits, assuming that each unit of service has a market price of $10 refers to
the Type I problem.
e) Maximize the ration of benefits to costs assuming that each unit of service has a market price
of $10 refers to the Type III problem.
2. Determine which of the two main programs (Program I and Program II) should be
selected under each of these criteria. Justify your position.
Answer: The complex relationship between the cost and effectiveness can be witnessed while
considering these four problems. Therefore, it is advisable that the relationship among these two
elements, namely, costs and effectiveness should be taken into consideration rather than viewing
both the elements separately (Dunn, 2012). Mentioned below are the details:
a) Maximize effectiveness at the least should be preferred considering Program I. The reason
behind the same is that the program displays equal-effectiveness. If the cost and effectiveness are
observed it can be stated that both are not varying freely. Moreover, at the balance point, the
ratio among the effectiveness and the cost is lowest.
b) Maximize effectiveness at a fixed cost of $10,000 should be preferred considering Program II.
The reason behind the same is that it can be observed achieving high level of effectiveness and
simultaneously remains under the limitation of the fixed cost.
c) Achieve a fixed-effectiveness level of 6000 units of services at a fixed cost of $20,000 should
be preferred considering the Program II. The reason behind the same is that the ratio of the
effectiveness to the cost will be observed to be greatest at the interaction point.

d) Maximize net benefits, assuming that each of service has a market price of $10 should be
preferred considering the Program II. The reason behind the same is that it can be witnessed to
be achieving high level of effectiveness while staying under the fixed cost limitation.
e) Maximize the ration of benefts to costs assuming that each unit of service has a market price
of $10 should be preferred considering the Program I. The reason behind the same is that the
program displays equal-effectiveness. The variation among cost and effectiveness is not free.
Moreover, the ratio among the two is lowest at the balance point.
3. Describe the conditions under which each criterion may be an adequate measure of the
achievement of objectives.
Answer: Prior to describing the conditions under which each criterion may be an adequate
measure of the achievement of the objectives, it is advisable that the basic objectives of decision
issues must be considered that is about understanding the reason behind the interest of decision
maker in certain decision. It can be stated that listing down the complete basic objectives for the
decision is a tedious activity. Therefore, it consumes time, mental energy, and requires some
appreciation. The criteria related to policy prescription provides various suggestive measures that
can be used as help in completing the task properly and providing measures that can be used in
appraising the basic objectives’ qualities. To conduct the analysis of the various options as per
the objectives, attribute is required for the measurement of the objectives. Proper attributes aids
in the appreciable analysis.
For decision situations, one can witness particular time when it gets considered. Prior to that time
period, no awareness exists for the decision. The categorization of the decision situations can be
done based on the way elevation to consciousness was done. Some of them are caused by the
external incidences and factors, which is stated as triggers which state that the decisions need to
be made. Triggers come from various situations or incidents that are not the part of the decision
maker. Therefore, such decision situations can be referred as the decision problems. One of the
other ways that the decision maker realizes the need of the decision is when he or she thinks that
some control is necessary on the situation. This can be referred as the internal trigger or factor.
The consideration that a decision is needed to be made is the first step towards decision making.
Some examples are: Can the agency maximize effectiveness at a fixed cost of $10,000? What is
the right method to improve the agency effectiveness? And so on.
4. Determine the assumptions that govern estimates of the value of time lost driving,
indicating which assumptions (if any) are more tenable than others. Justify your position.
Answer: Walk time, wait time and in-vehicle travel time are the various aspects of the travel
time savings. Travel time refers to the cost incurred by the users and the value related to this is
concerned with the benefits that have been derived from the same by the traveller. If the travel
time reduces then the saved time will be converted into extra time that will be available for the
individual to leisure or work. The service should be reliable which directly relates to the transit

service and which is directly connected with the level of service, perceptions about the quality,
time spent in waiting and consistency. The trip that has unpredictable travel time will push the
travel to allot more time for travelling. Mentioned below are the shifts that can be suggested to
improve the reliability by the travellers:
From Bus to Rail: Different modes of travel have their specific transit time depending on the
challenges confronting in front. Buses can be stated as the less reliable service in comparison to
the rail as the buses travel on road among various traffic challenges. The fixed routes of buses
tries to reduce the transit time but traffic congestion cannot be ignored even then. On the other
hand, rail provides less transit time and better service perception.
From Auto to Rail: Reliability studies concerning mode change from Auto to Rail is negligible.
Though from the basic consensus it can be stated that the reliability gain is equal to half of what
has been observed in bus-to-rail. However, the traffic congestion is witnessed by the auto then
the reliability will be almost equal to the bus to rail.
5. Determine the best way to estimate the value of time. Justify your position.
The travel time savings need to be converted into the hours spent in the travel to the dollars
which will help in the proper understanding in terms of cost incurred. The travel time has been
traditionally considered as the percentage of the average wage rate. The analysis in this case
considered value of time estimate (which is the percentage of average wage rate) has been
derived after reviewing the other studies. The travel time has two aspects one is travelling for the
work commute purpose and the non-work purpose. The value of former is taken higher than the
later. The peak period of travelling has been considered to the work commute purpose and the
off peak period has been referred to the non-work purpose.
The average rate calculation will be done based on the recent calendar available from the
MSESD (Minnesota State Employment Security Department) employment data on the salaries.
The weighted average of the wage rate has been found to be $22.54 per hour for the three
country region. The average hourly wage rate in the next two years reached #24.03 per hour
which indicates the peak of VOT of $14.42 and the off-peak VOT of $12.02.
6. Determine the best way to estimate the cost of a gallon of gasoline. Justify your position.
The best way to estimate the cost of a gallon of gasoline would be to consider the distance of the
trip, fuel efficiency of the vehicle, and the current price of the gas. For example, if the trip
distance has been 10 miles, the fuel efficiency of the vehicle is 15 mile per gallon, and the
current gas price is $20 per gallon, then it will take 0.67 gallons or 2.52 liters of gas with fuel
cost of $13.33.
The reason behind the selection of these factors is that the cost of a gallon entirely depends on
these factors. The distance spent by the traveller will consume the similar amount of gasoline.
The efficiency of the vehicle is the major factor behind the level of gasoline consumption by the
vehicle. If the vehicle has consumes less gasoline then it is bound to incur less cost. The third

factor, the price of the gasoline is determined by the international market situation which not in
the control of the individuals. The combination all these three factors result into the cost of a
gallon of gasoline spent.
7. Determine the more reliable method to estimate driving speeds and miles per gallon by
using (a) official statistics on highway traffic from the Environmental Protection Agency or
by using (b) engineering studies of the efficiency of gasoline engines by the Department of
Energy. Discuss any consequences of using one source rather than another. Justify your
position.
The graph above shows in January 2003 the average retail price for a gallon of gasoline here in
the United States was $1.50; roughly equal to the real inflation adjusted price during much of the
preceding half century. Since then, the price of gasoline here in the United States has risen
sharply. It was last below $2 per gallon in February 2005, and for much of 2007, prices topped
$3 per gallon.
The Congressional Budget Office study examines the scope and intensity of consumers’
responses to the upward trend in gasoline prices that began in 2003 as mentioned above. “Those
responses have been large enough to interrupt a pattern of steady growth in total gasoline
consumption dating back to 1990, the last time here in the United States where gasoline prices
rose substantially” (Davis 2001). If current high prices and consumer’s responses to them
persist, the effect on overall gasoline consumption will grow stronger as older; less fuel efficient
vehicles are retired and as consumers consider other, less easily implemented adjustments to
their patterns of consumptions.
8. Estimate the value of a life saved. Justify your position.
From the overall study it can be stated that the value of life saved is appreciable.
9. Determine which policy is preferable, (a) the 55-mph speed limit or (b) the 65-mph limit.
Justify your position.

The 55-mph speed limit policy is preferable. This is more preferable because motorists can
reduce their fuel costs if they drive more slowly. The incentive to slow down will depend on
how much gasoline prices have increase, how much fuel would be saved by slowing down, and
how much motorists value their time while driving. The value of the potential fuel savings from
slowing down is rather small compared with reasonable measures of many motorists’ value of
time, so the likely effect of gasoline prices on highway speeds also should be rather small. For
any given reduction in speed, however, the fuel savings are greater at faster speeds and for less-
fuel-efficient vehicles.
References
Davis, C. Stacy. (2001). Transportation Energy Data Book: Edition 21-2001, ORNL-6966.
Retrieved on May 23, 2013; from: http://cta.ornl.gov/cta/Publications/Reports/ORNL-6966.pdf
Dunn, William N., Public Policy Analysis, Pearson, 5th ed., 2012, p. 74, 246-253.
Minnesota Department of Transportation, 2003, "Per Mile Costs of Operating Automobiles and
Trucks,". Retrieved on May 22, 2013; from: http://trid.trb.org/view.aspx?id=678531
USDOT, April 9, 1997; Revised February 2003, "Departmental Guidance on the Evaluation of
Travel Time in Economic Analysis Memo;". Retrieved on May 22, 2013; from: http://www.
dot.gov/sites/dot.dev/files/docs/vot_guidance_092811c.pdf.
US DOT, 2003, "Revised Departmental Guide lines: Valuation of Travel Time in Economic
Analysis" memorandum. Retrieved on may 22, 2013; from: http://www.dot.gov/regulations
/economic-values-used-in-analysis