Assignment 3: Prescribing Policies
Write five to six (5-6) page paper in which you:
(Note: Refer to Review Question 8 located at the end of Chapter 5 for criteria 1-3.)
- 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.
- Determine which of the two main programs (Program I and Program II) should be selected under each of these criteria. Justify your position.
- Describe the conditions under which each criterion may be an adequate measure of the achievement of objectives.
Question8.
Return to Figure 5.2 and consider the following criteria for prescription:
a.Maximize effectiveness at least cost [Note: Be careful—this is a tricky question].
b.Maximize effectiveness at a fixed cost of $10,000.
c.Minimize costs at a fixed-effectiveness level of 4,000 units of service.
d.Achieve a fixed-effectiveness level of 6,000 units of service at a fixed cost of $20,000.
e.Assuming that each unit of service has a market price of $10, maximize net benefits.
f.Again assuming that each unit of service has a market price of $10, maximize the ratio of benefits to costs.
Indicate which of the two main programs (program I and program II) should be selected under each of these criteria, and describe the conditions under which each criterion may be an adequate measure of the achievement of objectives.
1.Type I problems. Problems of this type involve equal costs and variable effectiveness. When maximum allowable budgetary expenditures result in fixed costs, the aim is to maximize effectiveness within the limits of available resources. For example, given a fixed budget of $1 million for each of two programs, a health policy analyst will prescribe the alternative that results in the greater improvement in the quality of health care in the community. The response to type I problems is called equal-cost analysis, because analysts compare alternatives that vary in effectiveness but whose costs are treated as equal. Here the most adequate policy is one that maximizes the attainment of objectives while remaining within the limits of fixed costs.
2.Type II problems. Problems of this type involve equal effectiveness and variable costs. When the level of valued outcomes is fixed, the aim is to minimize costs. For example, if public transportation facilities must serve at least 100,000 persons annually, the problem is to identify those alternatives—bus, monorail, subways—that will achieve this fixed level of effectiveness at least cost. The response to type II problems is called equal-effectiveness analysis, because analysts compare alternatives that vary in costs but whose effectiveness is equal. Here the most adequate policy is one that minimizes costs while achieving fixed levels of effectiveness.
(Note: Refer to the Demonstration Exercise at the end of Chapter 5 for criteria 4-9.)
- 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.
- Determine the best way to estimate the value of time. Justify your position.
- Determine the best way to estimate the cost of a gallon of gasoline. Justify your position.
- 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.
- Estimate the value of a life saved. Justify your position.
- Determine which policy is preferable, (a) the 55-mph speed limit or (b) the 65-mph limit. Justify your position.
Demonstration exercise:
Return to Chapter 1 and reread Case 1.1 (Saving Lives and Saving Time). Then read Case 5.1 (Opportunity Costs of Saving Lives—The 55 mph Speed Limit) below. Prepare a short analysis in which you answer these questions:
■What assumptions govern estimates of the value of time lost driving? Are some assumptions more tenable than others? Why?
■What is the best way to estimate the value of time? Justify your answer.
■What is the best way to estimate the cost of a gallon of gasoline? Justify your answer.
■Driving speeds and miles per gallon estimates may be based on official statistics on highway traffic from the Environmental Protection Agency and the Department of Energy or on engineering studies of the efficiency of gasoline engines. Which is the more reliable? Why? What are the consequences of using one source rather than another?
■What is the value of a life saved? Explain.
■Which policy is preferable, the 55 mph speed limit or the 65 mph limit that was abandoned in 1994?
Case 1.1
When advanced technologies are used to achieve policy goals, sociotechnical systems of considerable complexity is created. Although it is analytically tempting to prepare a comprehensive economic analysis of the costs and benefits of such policies, most practicing analysts do not have the time or the resources to do so. Given the time constraints of policy making, many analyses are completed in a period of several days to a month, and in most cases policy analyses do not involve the collection and analysis of new data. Early on in a project, policy makers and their staffs typically want an overview of the problem situation and the potential impacts of alternative policies. Under these circumstances, the scorecard is appropriate.
The Goeller scorecard, named after Bruce Goeller of the RAN D Corporation, is appropriate for this purpose. Table C1.1 shows the impacts of alternative transportation systems. Some of the impacts involve transportation services used by members of the community, whereas others involve impacts on low-income groups. In this case, as Quade observes, the large number of diverse impacts are difficult to value in dollar terms, making a benefit-cost analysis impractical and even impossible.50 Other impacts involve financial and economic questions such as investments, jobs created, sales, and tax revenues. Other impacts are distributional because they involve the differential effects of transportation. ■
TABLE C1.1
Scorecard
| Social Impacts | CTOL | VTOL | TACV |
| TRANSPORTATION | |||
| Passengers (million miles) | 7 | 4 | 9 |
| Per trip time (hours) | 2 | 1.5 | 2.5 |
| Per trip cost ($) | $17 | $28 | $20 |
| Reduced congestion (%) | 0% | 5% | 10% |
| FINANCIAL | |||
| Investment ($ millions) | $150 | $200 | $200 |
| Annual subsidy ($ millions) | 0 | 0 | 90 |
| ECONOMIC | |||
| Added jobs (thousands) | 20 | 25 | 100 |
| Added sales ($millions) | 50 | 88 | 500 |
| COMMUNITY | |||
| Noise (households) | 10 | 1 | 20 |
| Added air pollution (%) | 3% | 9% | 1% |
| Petroleum savings (%) | 0% | −20% | 30% |
| Displaced households | 0 | 20 | 500 |
| Taxes lost ($millions) | 0 | 0.2 | 2 |
| Landmarks destroyed | None | None | Fort X |
| DISTRIBUTIONAL | |||
| Low-income trips (%) | 7% | 1% | 20% |
| Low-income household | |||
| Noise annoyance (%) | 2% | 16% | 40% |
Case 5.1
Conducting a benefit-cost analysis is not only a technical matter of economic analysis. It is also a matter of identifying, and if necessary challenging, the assumptions on which benefit-cost analysis is based. This can be seen if we examine the case of the National Maximum Speed Limit of 1974.
Table 5.11 describes steps in conducting a benefit-cost analysis and a critique of the assumptions underlying the analysis. The case shows, among other things, that all steps in conducting a benefit-cost are sensitive to these assumptions. ■
TABLE 5.11
Measuring the Costs and Benefits of the 55 mph Speed Limit: A Critical Appraisal
| Steps | Critique |
| Costs | |
| 1. The major cost of the National Maximum Speed Law (NMSL) was the additional time spent driving as a result of slower speeds. To calculate the number of hours spent driving in 1973, divide the total number of vehicle miles traveled on interstate highways by the average highway speed (65 mph) and then multiply by the average occupancy rate per vehicle, which is approximately 1.77 persons. | Why use 1973 mileage without any adjustment? The average growth rate in travel before 1973 was 4 percent. Therefore, the formula should be |
| Next, find the number of hours spent driving in 1974 by dividing total vehicle miles traveled on interstate highways by the average highway speed in 1974 (58 mph). The NMSL caused some people to cancel trips and others to find alternative modes of transportation; as a result, time calculations based on 1974 mileage would be an underestimate. Therefore, we should use the 1973 mileage of 525 million miles. | |
| Using the following formula, where VM is vehicle miles, S is average speed, R is average occupancy rate, and H is the number of hours lost, | |
| The number of hours lost driving in 1974, based on this equation, is estimated to be 1.72 billion. | Using the above formula, the estimated number of hours lost should be 1.95 billion—not 1.72 billion. |
| 2. To estimate the value of this time, begin with the average wage rate for all members of the labor force in 1974—$5.05. The value of one hour’s travel is not $5.05 per hour because very few persons would pay this sum to avoid an hour of travel. We estimate that the people will pay up to 33 percent of their average hourly wage rate to avoid an hour of commuting. The value of time spent traveling is therefore about $1.68 per hour. | Why take a percentage of the $5.05 figure based on what commuters would pay to avoid an hour of travel? We should avoid reducing the value of people’s time for two reasons. First, the value of time in cost to society is equal to what society will pay for productive use of that time. Time’s value is not what a commuter will pay to avoid commuting because commuting has other benefits, such as solitude for thinking or the advantages of suburban living. Second, the value of time spent driving for a trucker is many times the industrial wage rate. Discounting would greatly underestimate the value of commercial drivers. |
| 3. Application of the cost figure ($1.68) to the time lost figure (1.72 billion hours) results in an estimated travel cost of $2.89 billion. | Applying the value of one hour’s time to the hours lost as calculated above (1.95 billion) results in an estimated travel cost of $9.85 billion. |
| 4. The NMSL also has some enforcement costs. Total enforcement costs for signs, advertising, and patrolling are about $810,000. | Total enforcement cost should be about $12 million-not $810,000. |
| a. New signs were posted. Cost estimates from 25 states for modification of speed limit signs totaled $707,000; for 50 states, this results in an estimated $1.23 million. Spread out over the three-year life of traffic signs, we get an estimate of $410,000. | OK. |
| b. The federal government engaged in an advertising campaign encouraging compliance. The Federal Highway Administration’s advertising budget for 1974 was $2 million. About 10 percent of this, or $200,000, was spent to encourage compliance with the NMSL. Assume that an additional amount of public service advertising time was donated, for a total of $400,000. | Not OK. The Federal Highway Administration does other advertising. Public service advertising estimate also seems low. |
| c. Compliance costs are difficult to estimate. The cost of highway patrols cannot be used because these persons were patrolling highways before the NMSL. Assume that states did not hire additional personnel solely for enforcement of the NMSL. Therefore, we assume that enforcement of the NMSL will not entail any additional costs above enforcement of previous speed limits. | Compliance costs pose some problems, but they can be estimated. In 1973, some 5,711,617 traffic citations jumped by 1,713,636 to over 7.4 million. Each additional traffic citation includes an opportunity cost to society. If a law enforcement officer were not issuing traffic tickets, he or she could be solving other crimes. Assuming that it requires 15 minutes for a law enforcement officer to issue a speeding ticket, the total cost of law enforcement is $2.9 million. This figure is based on the average cost of placing a law enforcement officer on the streets at $6.75 per hour. This figure is clearly an underestimate because it does not count time lost waiting to catch speeders. |
| Approximately 10 percent of all speeders will demand a court hearing. Estimating an average of 30 minutes for each hearing and an hourly court cost of $45 results in an additional cost to society of $3.8 million for 171,000 cases. Given the overloaded court dockets, this opportunity cost may be even higher. | |
| Benefits | |
| 1. The most apparent benefit of the NMSL is the amount of gasoline saved. The average gasoline economy improves from 14.9 miles per gallon at 65 miles per hour to 16.1 at 58 miles per hour. Use this information to estimate the number of gallons of gasoline saved by traveling at lower speeds. Gallons saved will be calculated by the following formula, where VMT is vehicle miles traveled on interstate highways (not all highways) and MPG is miles per gallon. | Why estimate gasoline saved by comparing 1973 and 1974 miles-per-gallon figures in relation to vehicle miles traveled? The federal figures for average miles per hour are estimates based on several assumptions. Given the conflict between industry estimates, Environmental Protection Agency estimates, and Energy Department estimates, any miles-per-hour estimate must be considered unreliable. The number of vehicle miles traveled is also based on gallons of fuel sold multiplied by average miles per hour. Hence, this figure is also subject to error. |
| Studies of the efficiency of gasoline engines show that the effect of reducing the average speed of free-flow interstate highways would be to save 2.57 percent of the normal gas used. In 1979, American motorists consumed 106.3 billion gallons of gasoline. Saving 2.57 percent would total 2.73 billion gallons. | |
| In 1974, the average price of gasoline was 52.8 cents per gallon. This market price, however, does not reflect the social cost of gasoline, due to government price controls on domestic oil. The marginal (or replacement) cost of crude oil is the price of foreign oil. Therefore, the price of gasoline must reflect the higher cost of foreign oil. Use the market price of gasoline in the absence of price controls, which is about 71.8 cents per gallon. This figure yields an estimate of $2.50 billion in benefits through gasoline saved. | Why use the market price? There is no way to determine whether a marginal gallon of gasoline will be imported or come from domestic reserves. In addition, the costs and benefits of the NMSL should not be distorted simply because the U.S. government does not have a market-oriented energy policy. In 1974, gasoline cost 52.8 cents per gallon, and therefore, a gallon of gasoline saved was worth 52.8 cents. |
| 2. A major second-order benefit of the 55 mph limit was a large drop in traffic fatalities, from 55,087 in 1973 to 46,049 in 1974. Part of the gain must be attributable to reduction in traffic speeds. Studies by the National Safety Council estimate that up to 59 percent of the decline in fatalities was the result of the speed limit. Applying this proportion to the decline in fatalities provides an estimated 5,332 lives saved. The consensus of several studies is that a traffic fatality costs $240,000 in 1974 dollars. Using this figure, the value of lives saved in 1974 is estimated at $1,279.7 million. | OK. |
| 3. The NMSL also resulted in a reduction of nonfatal injuries. Use the 59 percent figure found in the fatality studies. Between 1973 and 1974, nonfatal traffic injuries declined by 182,626. Applying the estimated percentages results in 107,749 injuries avoided. Generally, three levels of injuries are indentified: (1) permanent total disability, (2) permanent partial disability and permanent disfigurement, and (3) nonpermanent injury. In 1971, the proportion of traffic injuries that accounted for injuries in each category was 0.2 percent, 6.5 percent, and 93.3 percent, respectively. The National Highway Traffic Safety Administration estimated that in 1971, the average cost of each type of injury was $260,300, $67,100, and $2,465, respectively. The average injury, therefore, cost $8,745 in 1974 dollars. Applying this figure to our injury estimate results in $942.3 million as the social benefit of injury reduction. | OK. |
| 4. The final benefit of the reduction in property damage fell from 25.8 million to 23.1 million. About 50 percent of this reduction was the result of lower speeds. The NMSL saved 1.3 million cases of property damage at an average cost of $363. Therefore, the total benefit from property damage prevented is $472 million. | OK. |
| Conclusion | |
| The first estimate of the costs and benefits of the NMSL results in the following figures (in millions): | Using different assumptions, the second estimate of the costs and benefits of the NMSL is as follows (in millions): |
| Costs | Costs |
| Time spent traveling | $2,890.0 | Time spent traveling | $9,848.0 |
| Enforcement | .8 | Enforcement | 12.0 |
| $2,890.8 | $9,860.0 | ||
| Benefits | Benefits | ||
| Gasoline saved | $2,500.0 | Gasoline save | $1,442.0 |
| Lives saved | 1.297.7 | Lives saved | 998.0 |
| Injuries prevented | 942.3 | Injuries prevented | 722.0 |
| Property damage averted | 472.0 | Property damage adverted | 236.0 |
| $5,212.0 | $3,398.0 | ||
| Net benefits: $2,321.2 million | Net benefits: −$6,462 million | ||
| Benefits to costs ratio: 1.8 | Benefits to costs ratio: .345 |
- Include at least two (2) peer-reviewed references (no more than five [5] years old) from material outside the textbook to support your views. Note:Appropriate peer-reviewed references include scholarly articles and governmental Websites. Do not use open source Websites such as Wikipedia, Sparknotes.com, Ask.com, and similar Websites are not acceptable resources.
Your assignment must follow these formatting requirements:
- Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
- Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
The specific course learning outcomes associated with this assignment are:
- Recommend policy alternatives to deal with a specific problem.
- Examine the nature, characteristics, models, and / or methods pertinent to the structuring of policy problems.
- Compare and contrast approaches and / or techniques for prescribing preferred policies.
- Use technology and information resources to research issues in policy analysis and program evaluation.
- Write clearly and concisely about policy analysis and program evaluation using proper writing mechanics.
Click here to view the grading rubric for this assignment.