Why Cost/Benefit Analysis Is So Important

The world is becoming full of irrationality. Political decisions seem to be driven more by emotion than by science of late and all we see on television news are human interest stories rather than facts and analysis.

This creates an atmosphere where those who shout loudest are listened to while quiet scientific analysis is dumped. Thus organisations such as Extinction Rebellion get lots of publicity and media personalities such as Greta Thunberg get massive coverage however wrong they are.

But emotions drive bad decisions.

Let’s consider the issue of road safety for example. Everyone recognises that there are still too many deaths and serious injuries on our roads, many or which might be avoided. But if we decide this is a major national priority on which money should be spent (i.e. from taxes), where do we spend it? A rational person would say “spend it on the most cost-effective proposals because that way we will save the most lives or injuries for a given amount of expenditure”. Bearing in mind there are limited financial resources in any Government, this has to be the best approach.

But there are various ways to reduce casualties, which includes:

  • Redesigning roads to make them safer, including tackling known blackspots.
  • Improved driver training and tougher tests for new drivers.
  • Improving in-car safety by better engineered vehicles.
  • Improving emergency medical treatment after an accident.
  • Cutting ambulance response times.
  • Reducing traffic speeds that might reduce casualty severity.
  • Exhortations to drivers to take more care with publicity campaigns.

You can probably think of some others that might help but the first four of the above have probably had the most impact in the last few years on casualty reduction. Where should the money be spent? What provides the best cost/benefit ratio is the answer.

At the lower level, if we decide that money spent on improving roads is worthwhile, then where do we spend it? The answer is again simple – on those locations where the money will save the most casualties. But many local councils ignore that approach and simply listen to local pressure groups.

Or at the higher level, should the Government spend money on road safety, on improving hospitals, or on improving home safety. For example about 1,700 people die in road accidents each year in the UK, but there are about 6,000 deaths each year from accidents in the home, and 40,000 deaths from cancer. The latter might be susceptible to more expenditure on treatment or research, while many home deaths are due to falls down stairs. Should the Government invest in lifts for all multi-storey homes or only allow bungalows to be built in future? Some 55% of injuries in the home are burns caused by cooking. Should the Government ban cooking?

You can see how this whole field is a minefield of conflicts of interest and instead of rational analysis people tend to spend money where they think it might help or based on traditional ideas. But the answer is to evaluate the cost versus the benefit on a simple uniform financial measure.

The benefit of saving a life, or a serious injury, can be valued and the Department for Transport regularly publishes their figures for those costs – currently it’s about £2 million for a fatality, £250,000 for a serious injury and £25,000 for a minor injury. One can dispute how it is calculated and how optimistic or pessimistic that figure is, but it does provide some basis for working out how much should be spent on saving a death. In addition there are many more minor accidents than KSIs (about 100 times the fatalities), and minor accidents are easier to value because you can simply add up the medical treatment costs, the lost employment time, the emergency services costs and then ask the victims how much they would have paid to avoid the injury. So the overall costs can be roughly estimated with some accuracy.

A similar calculation is made for many other purposes – for example, what is the benefit of treating a patient with a life saving drug versus its cost? Or how by how many years will their life be extended and how do you value an extension of life? Such calculations are a regular element in public policy decisions, although there are few hard guidelines on the subject at present.

The above indicates how the benefits might be calculated. To offset those one has to work out the costs. That includes in the case of revised road schemes, the construction cost of course, but there are often costs (or savings) imposed on road users. For example, in the recently discussed case of the Chislehurst War Memorial Traffic Lights (see https://tinyurl.com/y56v2rty ) where it was proposed to install a Pelican Crossing, the costs are not just the construction cost but the on-going costs imposed on the road users by the extra delays and traffic queues of having a pedestrian phase in the lights. In addition there are the negative costs of more accidents on minor roads due to traffic diversion to avoid the jams, and more air pollution from the stationary queues of traffic. These can all be estimated.

On the subject of air pollution, we currently have a lot of debate about the impact of that and what should be done to improve it. But there is typically little cost/benefit analysis. In reality, even if all air pollution was removed (an impossible task as a lot of it comes from natural sources), it might only extend the average population life by a few days. Meanwhile in London alone hundreds of millions of pounds of costs are being imposed on residents in the name of solving the problem. The cost/benefit on the ABD’s calculations for the London ULEZ scheme is extremely negative – see https://tinyurl.com/y4w6pwuk for the figures. Even Birmingham Council produced a negative figure when trying to justify their CAZ scheme but they still decided to go ahead.

This is public policy making turned on its head. The fact that both such schemes will generate large amounts of revenue for the Mayor of London and Birmingham Council was perhaps a more important part of their considerations! These “taxes” are an irrational imposition on the public and are not even an efficient way of collecting taxes.

Transport for London (TfL) have even given up on publishing any cost/benefit analyses of most new road schemes mainly because the figures when calculated show that they are simply uneconomic. Or they publish figures that are distorted by not including all the costs – for example on their “Safer Speed” plans.

Public life is being corrupted by the approach of relying on emotion to make decisions or by other motives rather than on a proper cost/benefit analysis. We need more politicians who are better educated and understand these issues, and the general public also needs to become better informed on these matters.

Roger Lawson

Twitter: https://twitter.com/Drivers_London

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