Question

A 40-mile stretch of rural road with limited access is used primarily by regional commuters and business travelers to move between two major interstate highways. The legal speed limit on the road is currently 55 miles per hour (mph) and the estimated average speed is 61 mph. Traffic engineers predict that if the speed limit were raised to 65 mph and enforcement levels were kept constant, the average speed would rise to 70 mph.

Currently, an average of 5,880 vehicles per day use the stretch of road -- approximately half are commuters and half are business travelers. Traffic engineers do not expect that a higher speed limit will attract more vehicles. Vehicles using the road carry, on average, 1.6 people. Traffic engineers predict that raising the speed limit on this stretch of road would result in an additional 52 vehicle crashes involving, on average, 0.1 fatalities annually. They also predict that operating costs would rise by an average of $0.002 per mile per vehicle.

The average hourly wage in the county in which the majority of users of the road work is $18.30/hour.

           

What would be the general categories of benefits and costs associate with raising the speed limit?

Estimate the annual net benefits of raising the speed limit on the road from 55 mph to 65 mph. In doing this, test the sensitivity of your estimate of annual net benefits to several alternative estimates of the value of time savings and the value of life that you have selected from the chapter.

Answer 1

Answer below,

1. Here is a summary:

BENEFITS:
Value of time saved	3,576,182
COSTS:
Operating cost	171,696
Fatal crash cost	500,000
Non-fatal crash cost	5,200,000
Net Benefits	-2,295,514

Sensitivity Analysis: VSL (Millions) 2 4 5 6 Cost of An Accident 1 2,164,486 924,486 304,486 -315,514 (as % VSL) 2 1,124,486 -1,155,514 -2,295,514 -3,435,514 4 -955,514 -5,315,514 -7,495,514 -9,675,514

This table indicates that annual net benefits are very sensitive to the assumption made about the value of life and the cost of an accident (as a % of the VSL).

For more explanation about how to compute these numbers, see the Excel file or continue reading. (The numbers differ slightly due to rounding).

The major benefit of the increase in the speed limit arises from a reduction in travel time. The major costs arise from increases in fatalities, accidents, and vehicle operating expenses.

TIME SAVED:

Time saved per vehicle = 40/61 – 40/70 = 0.084309 hrs

Number of passengers per year = 5880x365x1.6 = 3.434 million

Vehicle-hour savings = 0.0843 x 3.434 million = 289,510 hours

Value of time savings (business travelers at full wage rate; commuters at 0.5 times after-tax wage rate)

= [(.5)($18.30)+(.5)(.5)(.7)($18.30)]x289,510 = $3,576,172

This assumes the average person faces a tax rate of 30%. Strictly speaking the wages for business travellers should include hourly benefits.

ADDITIONAL VEHICLE OPERATING COSTS:

Number of vehicle miles = 5880 x 365 x 40 = 85.85 million miles

Additional operating cost = ($0.002/mile) x (85.85 million miles) = $171,700

ADDITIONAL FATAL ACCIDENT COSTS:

Assuming, the cost of Fatal Accident = $5.0 million (using the best point estimate of VSL in Table 16-1):

Additional Fatal Accident Costs = (.1)($5,000,000) = $500,000

ADDITIONAL INJURY COSTS:

Table 16-3 shows that the cost of a non-fatal crash varies between roughly 0.1 percent of the VSL and 80 percent of the VSL. The actual distribution of crashes is heavily weighted towards minor injuries. Suppose the average crash cost equals 2 percent of the VSL, then:

Additional injury costs = (52 accidents)(0.02)($5,000,000) = $5.2 million

NET BENEFITS:

Consequently, the annual net benefits = -$2,295,528 (in 2008 dollars)