Benefit -cost analysis of Honda Civic Hybrid Sedan

Case 1: Benefit-Cost Analysis of Honda Civic Hybrid Sedan

BACKGROUND

In 2003, Honda released the first hybrid version of its popular Honda Civic. Since then, many states and the U.S. federal government have applied incentives to encourage individuals to purchase hybrid vehicles. The 2005 Energy Policy Act granted individuals who purchased new hybrid vehicles a tax credit, which depends on the fuel economy of the model (miles per gallon, or mpg). This tax credit expired December 31, 2009. In the period since, there have been calls to renew it. Many states also offer their own incentives programs.

Is subsidizing hybrids a wise use of public resources? This is the question this case is designed to answer.  To answer this question, there are two related issues to consider.

First, taking into account society’s perspective, the question to consider is whether the additional (incremental) benefits of driving a hybrid are greater than the additional (incremental) costs, compared to the non-hybrid model. Fundamentally, this question boils down to whether the value of the fuel savings from driving the hybrid are larger than the increased technology cost of the hybrid. The value of fuel savings includes the value of conserving a scarce resource – energy– but also the value of avoiding the social costs associated with energy usage, such as CO2 emissions, local air pollution, and the risks to national security associated with importing oil. Consumers deciding whether to buy hybrids are aware of the fuel savings benefits that they will realize if they buy and drive hybrids, and will considerthe expected value of these fuel savings in their purchase decision.  However, the consumer’s computation of fuel savings benefits will differ from the societal perspective, because the fuel prices consumers face are distorted by fuel taxes.  So the “price signals” consumers face about the value of fuel savings are likely to differ from the “shadow price” of fuel savings – the value of fuel savings from a societal perspective. And of course, consumers are not fully aware of the value of the reduced global warming risks, benefits to reducing local air pollution, or reducing national security risks, because these external benefits are diffuse and distributed to everyone. In sum, consumers will ignore the positive externalities from reducing fuel consumption, and get inaccurate price signals about the monetized value of fuel savings as seen from the larger societal perspective.

The increased technology costs are in the form of the additional costs for the hybrid drive train, which adds to the conventional system:  (1) an electric motor (2) a large capacity battery and (3) the power electronics that link these components together.  The price consumers pay for Honda civic hybrid will actually be higher than these costs, because there is 7% sales tax imposed on the purchase of hybrids. The societal analysis will “shadow price” the technology cost of producing Honda civic hybrids as the price consumer’s pay less the sales tax.

The net-value of purchasing and driving hybrids from a societal perspective can be obtained in two equally good ways. First, by summing the net effect of driving a hybrid on all of the “stakeholders.”  If the net-effects are positive, the project passes the Kaldor-Hicks standard, equivalent to benefits being larger than costs.

The stakeholders in this situation can be aggregated to the following four groups:

  • The hybrid user;
  • State governments, who receive additional sales tax revenue from higher hybrid sales prices, but also lose fuel tax revenue from improved hybrid fuel economy;
  • The federal government, which loses fuel tax revenue;
  • “the public” who gains the “societal” or external benefits of hybrid use;  that is, the reduced air pollution, carbon dioxide emissions, and the value of reduced oil imports.

Summing the net effects on (1)-(4) will give the same result as directly comparing the shadow-priced value of the fuel savings – the monetized benefits from the societal perspective — against the costs. That is, a benefit-cost analysis is the second method for determining economic efficiency. 

The complete picture is shown in Table 1.  Summing the net-stakeholder effects in the bottom row of the tableau produces the societal net benefit in the rightmost bottom cell, B1+B2-C1. This is the after-tax value of fuel savings plus environmental benefits less the technology costs.  You can see the same result just by comparing the benefits against the cost in the right most column of the tableau.

Note that the column for the “Buyer of the Honda Civic” shows the private perspective from the purchase of the Honda Hybrid. This column represents the financial returns and losses to the buyer of  a Honda hybrid. Comparing this column to the right-most column of the tableau allows you to see how the private buyer perspective differs from the societal perspective.  As mentioned above, there are two differences between these perspectives. First, there is the added benefits to society of avoided pollution and other external costs of fuel use, which the private user themselves donot experience, but society gains (B2). Hence, the private buyer doesn’t take into account this external benefit when they purchase the hybrid. Secondly, part of the hybrid buyer’s financial gain in avoiding fuel expenses is not a net gain from the societal perspective. That’s because fuel tax savings of the hybrid driver (T2+T3) are lost to governments, i.e., to states(-T2) and the federal government(-T3). In short, what is the buyers’ gain is another stakeholders loss, so, as financial transfers, these effects cancel to zero from a societal perspective.

Similarly, the additional financial loss to the buyer of paying a sales tax on hybrids (-T1) is not a net-societal loss, because another stakeholder –the state in this case–  collects the sales tax (T1). Again, the loss to one stakeholder is counterbalanced by the gain to another, so these gains and losses net to zero from the societal perspective.

The first task then, is to complete Table 1 with actual values, and to see if B1+B2-C1 in the far right-hand corner is positive or negative.

If it is negative, it does not make sense for the government to promote hybrid usage, if the Kaldor-Hicks standard (Potential Pareto Criteria) is the decision-making standard. That is, if benefits are less than costs, it doesn’t make sense to subsidize this project on efficiency grounds.

If it is positive, we then have to look at the “Buyer of the Honda Hybrid” net result. If it is privately profitable to  buy hybrid Honda Civics without assistance, then the argument for providing subsidies is diminished – whatever the merits of driving hybrids. Why subsidize people to buy Honda hybrids if they are going to buy them anyway? If, however,   private hybrid buyers are taking a financial loss and yet driving hybrids has positive societal benefits, then it makes sense to offer a subsidy to promote the socially desirable behavior. (This is like subsidizing people to get flu shots, given that individuals do not take into account the larger social benefits of reducing flu in the population when they make a decision about getting a flu shot)  Note that such a subsidy is a pure financial transfer from the societal perspective – again to the hybrid driver, and a loss of equal amount to the government. So subsidizing hybrid users has no net effect from the societal perspective. But from an equity point of view, it wouldn’t make sense to transfer tax payer money to hybrid drivers, unless there was some larger societal purpose to do so.

Note: As shown in Table 1 and discussed above, the computation of the buyer’s financial effect should not include tax credits.  It is necessary to compute the impact on the buyer without the tax credit, to see whether or not a tax credit is needed.

The impact on state and federal fuel tax collections is also policy relevant. States and the federal government rely on fuel tax receipts to fund transportation investments. Growing fuel economy could reduce overall tax receipts, and reduce funds for transportation infrastructure.  “Erosion” of fuel tax revenue from greater fuel economy has worried some states enough to consider switching the tax base from fuel consumption to mileage.  See the state of Oregon’s experiments in this regard: http://www.terrapass.com/blog/posts/oregons-successful-mileage-tax-experiment

In short, the impact of hybrid driving on the receipts of state and federal tax revenues is policy relevant.

THE ASSIGNMENT

Your tasks are as follows:

  •  produce six tables like table 1 based on present value computations for the following scenarios;

Scenario 1:  10,000 miles per year driving, gasoline 2.50 per gal

Scenario 2:  10,000 miles per year driving, gasoline 3.50 per gal

Scenario 3:  10,000 miles per year driving, gasoline 4.50 per gal

Scenario 4:  20,000 miles per year driving, gasoline 2.50 per gal

Scenario 5:  20,000 miles per year driving, gasoline 3.50 per gal

Scenario 6:  20,000 miles per year driving, gasoline 4.50 per gal

  • Write a no-longer-than4 page double-space memorandum (this page length EXCLUDES ANY TABLES YOU MIGHT INCLUDE)which describes the analysis, presents the results, and then makes a recommendation whether or not Congress should renew tax credits for hybrids. Your memo should be broken down explicitly into sections with bolded headers as follows:

Introduction

Analysis Method and Assumptions

Results

Policy Recommendation

See memo for Cincinnati Vehicle Emissions Inspections case as a model for this kind of policy/decision memo.

GROUND RULES AND INSTRUCTIONS

  • You are encouraged to form working groups and collaborate on the analysis.
  • You must write up the memo yourself.
  • To complete the assignment, post two things on the assignment tab in Canvas:

* your memo in Word, which should include the six tables as appendices;

* spreadsheet showing the six computed tables, with their backup computations. Again, link  KHTs to source computations to facilitate computations of the different permutations (for miles/fuel price); 

(4)  Do the analysis from the end of 2018 perspective. Thus, for discounting purposes, period zero is 2018, period 1 is 2019, etc.

(5) Let me know if you have questions

Note: This analysis implicitly assumes that consumers are making a purchase decision about the hybrid version of the Honda Civic purely as an investment option with this question to be answered: do the fuel bill savings justify the additional costs?  In fact, many hybrid car owners make the decision to drive hybrids because they want to be socially responsible citizens, e.g., lower their carbon footprint. This group may be willing to buy hybrids even if the fuel bill savings do not cover the costs. Given this, it might be useful to think about this analysis as a way to encourage hybrid purchases beyond the group who would buy them anyway to be good citizens. That is, the purpose of the subsidies would be to expand the purchase of hybrids to consumers who would not be considering the social benefits of driving hybrids, but would just be comparing the benefits of long-run fuel bill savings to the higher initial expense for the car.

TABLES

Table 1: Kaldor-Hicks Tableau for Honda Hybrid Civic Buyer of Honda Hybrid State governments Federal Government Public receiving environmental and national security  benefits  of fuel savings Net Society
Benefits          
  Pre-tax value of fuel savings from driving hybrids B1       B1
Environmental and other external benefits       B2 B2
Transfer payments          
State  sales taxes -T1 +T1     0
State fuels taxes +T2 -T2     0
Federal fuel taxes +T3   -T3    
Costs          
Technology Cost differential -C1       -C1
Net B1+T2+T3-(T1+C1) T1-T2 -T3 B2 B1+B2-C1

Note: B1+T2+T3=consumer fuel expenditure savings, which equals avoided fuel tax payments, plus net-of-tax fuel expenditures.

The retail price differential of the hybrid (before sales tax) is C1.

The after sales-tax price differential is T1+C1.

So the net for consumers is the difference between avoided fuel expenses (B1+T2+T3) less the incremental price of hybrids (T1+C1).

All figures in the  table are discounted present values.

Table 2: Basic Data on Two Alternatives Hybrid Civic Sedan (lowest end model)  Conventional  Honda Civic Sedan (lowest end model)
Recommended Sticker Price (Does not include sales tax) $23800 $15655
Mpg  city 40 26
Mpg  highway 45 34
Table 3: Basic financial parameters which don’t vary  
Discount rate .07
State sales on car purchases .07 (Indiana)
State fuels tax 18 cents per gallon (Indiana)
Federal fuels tax 18.4 cents per gallon
Table 4: Fuel Price Assumptions  
High 4.5per gallon
Medium 3.5  per gallon
Low 2.5 per gallon

Other Basic Assumptions

  • Operation and maintenance (O&M) costs: no difference between options
  • Insurance costs: no difference between options.
  • Average vehicle life: 15 years/no salvage value at end:  no difference between options (from our perspective, it does not matter whether the car is sold, and resold during this period. It is simplest to treat it as a single ownership over the whole period)
  • Driving behavior: assume no difference between options:

Low: 10,000 miles per year

High: 20,000 miles per year

Equal mix of city and highway driving

Table 5: Societal Costs of Automobile Usage

Fuel-Related  
Global Warming $.06 per gallon
National Security $.12 per gallon
Local Pollution $.20 cents per gallon*
Total $.38 cents per gallon
Mileage related**  
Congestion $1.05 cents per mile**
Accidents $.63 cents per mile**

*Note: this was listed as .42 cents per mile. I took about half of this figure, because local auto emissions are controlled by catalytic converters, so reducing fuel consumption doesn’t necessarily reduce pollution that much. And these external costs are at least partially related to miles driven, which is we are assuming is the same for both vehicles

**I have included mileage related externalities just to show the external costs of driving beyond what the driver themselves imposes. However, YOU SHOULD NOT INCLUDE THESE IN THE ANALYSIS. REASON? WE’RE ASSUMING THE MILES DRIVEN BY BOTH HYBRIDS AND NONHYBRIDS ARE THE SAME. SO THESE EXTERNAL COSTS DON’T VARY ACROSS OPTIONS.

Source: Parry, I. W. H., Walls, M. & Harrington, W. (2007). Automobile externalities and policies. Journal of Economic Literature, XLV, 373–399.

NOTE ABOUT PARAMETER VALUES IN U.S. AND EUROPE.

  • FUEL TAXES. MUCH HIGHER IN EUROPE. BUT BECAUSE FUEL TAXES ARE TRANSFERS, THIS DOES NOT AFFECT NET-BENEFITS, I.E., THE BOTTOM LINE NET-EFFECT IN THE BOTTOM RIGHT HAND CELL OF THE TABLEAU. HOWEVER, FUEL TAXES WILL GREATLY AFFECT THE PRIVATE GAIN TO DRIVING HONDA CIVIC HYBRIDS (MUCH HIGHER IN EUROPE THAN COMPUTED IN THIS MEMO) AND THE LOSSES IN TAX RECEIPTS TO THE GOVERNMENT. IN SHORT, THE DIFFERENCES IN TAX RATES WILL HAVE A SIGNIFICANT DISTRIBUTIONAL EFFECTS, BUT NOT A NET EFFICIENCY EFFECT.
  • SALES TAXES. NOT SURE EXACTLY THE COMPARISON. BUT SINCE EUROPE HAS VALUE ADDED (VAT TAXES), THERE ARE LIKELY TO BE ADDITIONAL TAXES ON THE INPUT SIDE NOT REFLECTED IN THE ABOVE ANALYSIS.
  • GLOBAL WARMING EFFECTS. BY DEFINITION, THE SAME.
  • VALUE OF REDUCING IMPORTS. HIGHLY VARIABLE BY COUNTRY IN EUROPE. NORWAY IS A NET OIL EXPORTER, AND IS NOT CONCERNED ABOUT IMPORTS. GERMANY IS A NET OIL-IMPORTER.
  • LOCAL AIR QUALITY EFFECTS. LIKELY TO BE PRETTY MUCH THE SAME AS IN THE U.S. IN THE MORE DEVELOPED EU STATES, I.E., THE U.K, NORTHERN EUROPE. AIR QUALITY BENEFITS FROM REDUCING FUEL USE ARE LIKELY TO BE GREATER FOR NEWER EU COUNTRIES IN EASTERN EUROPE (POLAND/HUNGARY) AND SOUTHERN EUROPE (PORTUGAL, SOUTHERN ITALY, GREECE). AIR QUALITY STANDARDS THERE HAVE NOT BEEN UPGRADED TO THE LEVEL OF THE ADVANCED EU STATES.

SAMPLE PAPER

To: Director, Ohio EPA
From: Jill SPEON
Re: Economic Analysis of Vehicle Emissions Testing Programs
Date: Spring 2008
Introduction
Hamilton County Ohio, and the surrounding Air Quality Control Region, do not comply with
ambient air quality standards established under the Clean Air Act. The EPA has responded by
ordering Hamilton county to establish an annual vehicle emissions inspection and maintenance
(I&M) program. This emissions testing program should help bring the county into compliance
with applicable federal regulations.
This memo summarizes a cost analysis of three alternative ways of implementing the EPAmandated emissions inspection program, as well as an assessment of the net-benefits of twiceyearly inspections. The latter option goes beyond the EPA mandate, and would improve ambient
air quality in the region above the level required by law.
There are several feasible alternatives for achieving the program objective. First, Hamilton
county could require the area’s private service stations to offer the emissions tests as a
complement to annual safety inspections. The county would establish the fee level to cover the
incremental labor time and equipment costs associated with the emissions inspection. Second,
Hamilton county could itself construct, own, and operate five high-volume test facilities
exclusively dedicated to emissions testing. A fee would be charged to cover the associated costs.
Alternatively, the county could grant a franchise to a private operator who would construct, own,
and operate the five centralized facilities, in exchange for a negotiated agreement about the
inspections fee. Appendix 1 provides other relevant information and details about the program
alternatives.
With these choices as the alternatives, the analysis will show that the private service station
option is likely to offer the most-cost effective means of achieving the mandated emissions
reductions. This judgement is based on the standard measure of “cost” employed in cost-benefit
analysis. By the same measure, the benefits of the optional program expansion do not cover the
incremental cost for any program alternative. Hence, the conclusion follows that the county
should simply implement the EPA-mandated program, using private service stations as the venue
for the emissions testing.
The next section of this memo shows the essential elements of the cost-analysis and explains the
logic behind the policy recommendation. Next, we consider whether the program’s
distributional impact; fiscal effects, and employment impact affect the basic conclusion. Finally,
the memo summarizes the results of the benefit-cost study of the program expansion, and offers a
brief conclusion.
Cost Analysis
Tables 1 provide the structure of the comparative cost analysis for one set of assumptions about
program cost.1 Notice that the direct costs are lower for the centralized facilities than for the
private service station option. The centralization of I&M activities increases the efficiency of
labor and capital utilization and reduces administrative overhead. These advantages are large
enough to overcome the added costs associated with new facility construction. However, the
private service station option reduces inconvenience and direct transit costs associated with
emissions inspections (See “Travel and Time Costs” in Table 1). Since more than 2,000 service
stations would participate in the program, testing facilities would be proximate to most Hamilton
county residents, reducing travel times and costs. Moreover, inspections at private service
stations would be piggy-backed on top of annual safety inspections, sparing residents an added
trip for the primary emissions inspection. The associated transit and time cost savings are
sufficient to overcome the relatively high capital and labor costs, given the assumptions
underlying Table 1.
Because the relative merit of the private service option depends on avoiding direct transit and
time costs, it is important to assess whether results are robust to other assumptions about these
cost components. This assessment is particularly appropriate for inconvenience costs, which do
not have a direct market valuation.
Table 2 provides alternative program estimates based on time cost and travel cost valuations
spanning a range commonly used and/or derived in similar studies. Case 1 is taken from Table 1:
it is based on a relatively high valuation of time and transit costs (respectively, time costs
equaling 75% of the average wage rate in the community, and direct transit costs of 25 cents per
mile). Although the relative advantage of the service station option declines with lower direct
transit costs, it still remains the most-cost effective option if the value of time savings is high
(Case 2).When the value of time is relatively low (25% of the wage rate in the community), the
private service option is still lowest cost at the higher transit cost (Case 3), but the franchised
centralized option becomes the lowest-cost option when both the value of time and the cost of
transportation assume the lower bound (Case 4). This analyst believes that the lower bound
estimates are unlikely to obtain together and, therefore, that the private service station option can
be comfortably recommended if conventionally-measured cost effectiveness is the decision
criterion.
This analysis must be qualified on two counts. First, inconvenience costs could systematically
vary among options in ways not captured. For example, the state-operated facilities will operate
only during regular business hours, in contrast to the contractor-operated facilities and private
service stations. Consequently, some or all of the time valuations in Table 2 for the state option
could be biased on the low side. However, even with these estimates the state-operated system is
not cost-competitive under any scenario. Increasing the value of time costs for this option will
thus strengthen the original conclusion.
Conceivably, the program alternatives could differentially alter the flow of traffic; change the
pattern of congestion; and/or change the frequency of automobile accidents. All else constant,
1
The methodology assumptions and calculations underling all the Tables in this memo are described in
Appendix 2.
the service station option should minimize these collateral effects by avoiding the extra trip for
the primary emissions inspection. However, a transportation impact analysis would be needed to
enable a conclusive judgement.
Distributional Issues
The aggregate distributional impact of the program on the main participants is illustrated in
Table 3, using the valuations from Table 1 to illustrate the essential conclusions. The largest
impact is evidently on vehicle owners; they both pay inspection and repair fees and incur the
time and inconvenience costs. As noted, however, time and inconvenience costs for vehicle
owners are substantially lower for the service station option — a conclusion that holds under any
scenario (See Table 2). The per vehicle owner cost varies from about $20.00 per year for the
private service station option to close to $27 per year for the state-operated program.2 Hence, the
service station option disadvantages car owners relatively less than the other two options.3 Note,
however, that private service operators lose money under the program (See Table 3.1); the
aggregate loss in the table implies annual income lose to service owners of $720 per year. This
lose could be eliminated by allowing service stations to increase the fee level by $1.8 per
emissions inspection. Although such a fee increase would not undermine the relative cost
advantage to vehicle owners of the more convenient inspections, it would increase the total
burden to consumers of the program (from about $20.00 per vehicle owner per year to about
$21.8).
Note that the fiscal impact of the program is most beneficial for the contractor option, since
property tax revenue is generated.4 However, the vehicle owners pay the tax indirectly in the
form of higher inspection fees, which are 50 cents higher for the contractor option than the state
alternative. The state could entirely recoup the costs of its own emissions inspection program
simply by raising its own fee by 13 cents (See Appendix 1). This point draws attention to the fact
that the fiscal benefit of contractor option is entirely in the form of excess revenue over the direct
program costs (the use of labor, capital, etc). There are likely to be more efficient ways to raise
this kind of excess revenue than by implementing an emissions inspection program and charging
vehicle owners a relatively high price. Given these considerations, the revenue impact of the
contractor versus the state option does not seem to be a consequential issue for this analysis.
Possible employment impacts another distributional issue to consider (not presented in Table 3),
particularly since the private contractor claims employment creation as a benefit. This claim
cannot be conclusively evaluated with available information, but some deductions are possible.
First, it is not presumptively obvious that the contractor option would employ more labor than
the state-operated alternative or even the private service stations who may hire additional overtime workers to handle the demands of emissions testing. Even if it the contractor does employ
more labor, it is not clear that this labor would come from the unemployed pool or simply be
2
Derived by dividing the aggregate figures displayed in Table 3 by the number of registered vehicles in the
county (800,000).
3
This point shows that the fee level is itself not fully relevant for judging the distributional effects of the
program. Time and inconvenience costs are a larger fraction of the price consumers pay than the actual fee itself,
which ranges between 4.00 and 6.00 per inspection for the different program options .
4
This is on the assumption that the buildings constructed by the Contractor represent net additions to the
county’s building stock (rather than diverted investment). The overall analysis is premised on this assumption.
diverted from other employment sources. (It is not clear that any option will measurably perturb
the aggregate employment baseline.) However, if the contractor does create net employment, the
wage bill would overstate labor costs. But notice that entire wage bill for the contractor could be
deducted from the cost calculation and contractor option would still be more expensive than the
private service station option under the assumptions represented for Cases 1 and Cases 2 (in
Table 2). In view of all of the qualifications, it does not seem likely that employment effect of
contractor option will affect the relative cost-comparison (in any direction), but a jobs impact
assessment would be needed to draw a definitive conclusion.
Benefit-Cost Analysis of Program Expansion
Relative to the one-a-year inspection baseline, semi-annual inspections will reduce ambient
ozone concentrations by 10% to .18 mgm3. This air quality improvement will save lives and
enhance worker productivity. Table 4 presents estimates of the value of these benefits against the
incremental costs of moving from an annual to a semi-annual inspection regime for each of the
program options, under a range of cost permutations. It can be seen that benefits of air quality
improvements are less than the incremental costs in all cases. Hence, the optional expansion of
the emissions inspection program is not justified by benefit/cost analysis.
It should be mentioned that the estimation of air quality benefits and, in particular, the value of
human life savings, is a very controversial subject. Hence, results of this part of the analysis
should be interpreted with particular caution. As a matter of perspective, the benefit estimates
used are at the upper range of those found in the benefits valuation literature. Hence, varying the
benefit valuation parameter over the range found in the literature will not vitiate the conclusion
that the optional program expansion does not pay off.
Conclusion
Given the available information, the analysis suggest that the service station option is the most
cost-effective program alternative for implementing the once-a-year emissions inspections
mandate. The conclusion is relatively robust with respect to standard variations in the literature
about the value of time and travel costs, and is not altered fundamentally when distributional,
fiscal, or employment concerns are introduced. The latter either do not vary systematically
across alternatives; vary in ways that are not significant; or vary in ways that reinforce the
essential conclusion.
However, the impact of the program of private service station operators is one possible concern
of the recommended option. The program administrator should reconsider the charge level to
determine if an equity adjustment is warranted.
The benefit-cost analysis does not support a beyond-compliance program expansion. Hence, the
recommendation is simply to implement the mandated program using private service stations to
administer the emissions tests.
Table 1: Costs of Annual Emission Inspection Programs: High Cost Estimate*
(Figures in $; base year = 2005)
________________________________________________________________________
Private Service
Contractor State Stations
Direct Costs

Buildings 650,000 700,000 0
Equipment 350,000 400,000 2,080,000
Labor 1,500,000 1,800,000 4,160,000
Insurance 300,000 300,000 0
Administrative 100,000 100,000 250,000
Repair 6,240,000 6,240,000 6,240,000
Subtotal
Travel &
Time Costs
9,140,000 9,540,000 12,730,000
Mileage 3,068,000 3,068,000 336,000
Time 8,840,000 8,840,000 4,620,000
Subtotal 11,908,000 11,908,000 4,956,000
Total 21,048,000 21,448,000 17, 686,000

*Time cost = .75 of wage rate; mileage costs = .25/mile
_____________________________________________________________________
Table 2: Sensitivity Analysis of Travel and Time Costs
(Figures in $, base year=2005)
____________________________________________________________________________

Subtotal Direct
Case 1 (.75, .25)*
Travel &
Time Costs
9,140,000 9,540,000 12,730,000
Mileage 3,068,000 3,068,000 336,000
Time 8,840,000 8,840,000 4,620,000
Subtotal 11,908,000 11,908,000 4,956,000
Total 21,048,000 21,448,000 17, 686,000

Case 2 (.75, .15)*
Travel &
Time Costs

Mileage 1,840,800 1,840,800 201,600
Time 8,840,000 8,840,000 4,620,000
Subtotal 10,680,800 10,680,800 4,821,600
Total
Case 3 (.25,.25)*
Travel &
Time Costs
19,820,800 20,220,800 17,551,660
Mileage 3,068,000 3,068,000 336,000
Time 2,946,667 2,946,667 1,540,000
Subtotal 6,014,667 6,014,667 1,876,000
Total
Case 4(.25, .15)*
Travel &
Time Costs
15,154,667 15,554,667 14,606,000
Mileage 1,840,800 1,840,800 201,600
Time 2,946,667 2,946,667 1,540,000
Subtotal 4,787,467 4,787,467 1,741,600
Total 13,927,467 14,327,467 14,471,600

____________________________________________________________________________*
*The first figure in the brackets provides an alternative estimate of the unit value of lost time
devoted to inspections, ranging from .75 to .25 of the average wage rate in the community (or
$7.50 an hour to $2.50 per hour). The second figure in the bracket provides alternative estimates
of the direct cost of transportation, ranging from 25 cents per mile to 15 cents per mile.
Table 3: Social Accounting Matrices of Annual Emission Inspection Programs: High Cost
Estimate* (Figures in $; base year=2005)
________________________________________________________________________
5.1 Option 1: Private Service Stations

Service
Stations
Vehicle
Mechanics Owners
County/
State
Net
Buildings 0
Equipment -2,080,000 -2,080,000
Labor -4,160,000 -4,160,000
Admin. -250,000 -250,000
Repair Costs -6,240,000 -6,240,000
Mileage Costs -336,000 -336,000
Time Costs -4,620,000 -4,620,000
Inspection
Fees 4,800,000 -4,800,000 0
Repair Fees 6,240,000 -6,240,000 0
Net -1,440,000 0 -15,996,000 -250,000 -17,686,000

5.2 Option 2: State Operated

Vehicle
Owners
County/
State
Mechanics Net
Buildings -700,000 -700,000
Equipment -400,000 -400,000
Labor -1,800,000 -1,800,000
Insurance -300,000 -300,000
Admin. -100,000 -100,000
Repair Costs -6,240,000 -6,240,000
Mileage Costs -3,068,000 -3,068,000
Time Costs -8,840,000 -8,840,000
Inspection
Fees -4,200,000 4,200,000 0
Repair Fees 6,240,000 -6,240,000 0
Net 0 -21,348,000 -100,000 -21,448,000

5.3 Contractor-Operated

Private
Contractor
Vehicle
Mechanics Owners
County/
State
Net
Buildings -650,000 -650,000
Equipment -350,000 -350,000
Labor -1,500,000 -1,500,000
Insurance -300,000 -300,000
Admin. -100,000 -100,000
Repair Costs -6,240,000 -6,240,000
Mileage Costs -3,068,000 -3,068,000
Time Costs -8,840,000 -8,840,000
Inspection
Fees 3,600,000 -3,600,000 0
Repair Fees 6,240,000 -6,240,000 0
Taxes -600,000 600,000 0
Net 200,000 0 -21,748,000 500,000 -21,048,000

Table 4: Benefits and Costs of Beyond-Compliance Program Expansion
(Figures $; base year = 2005)
Service Stations
Incremental Cost Benefit Net Benefit
High Case Estimate (.75,
.25)
14,532,000 7,320,000 -7,212,000
Medium Estimate 1 (.75,
.15)
14,039,200 7,320,000 -6,719,200
Medium Estimate 2 (.25,
.25)
10,572,000 7,320,000 -3,252,000
Low Case Cost Estimate
(.25, .15)
10,079,200 7,320,000 -2,759,200
State-Provided Inspections
Cost Benefit Net Benefit
High Case Estimate (.75,
.25)
14,606,000 7,320,000 -7,286,000
Medium Estimate 1 (.75,
.15)
13,567,600 7,320,000 -6,247,600
Medium Estimate 2 (.25,
.25)
9,619,333 7,320,000 -2,299,333
Low Case Cost Estimate
(.25, .15)
8,580,933 7,320,000 -1,260,933
Contractor-Provided Inspections
Cost Benefit Net Benefit
High Case Estimate (.75,
.25)
14,506,000 7,320,000 -7,186,000
Medium Estimate (.75, .15) 13,467,600 7,320,000 -6,147,600
Medium Estimate 2 (.25,
.25)
9,519,333 7,320,000 -2,199,333
Low Case Cost Estimate
(.25, .15)
8,480,933 7,320,000 -1,160,933
Derived from Page 5, Appendix 5
Appendix 1.
Appendix 1 is not shown since it replicates the information you have in the case
description. In real life, the level of detail about the program alternatives in the body of the
memo would need to reflect the state-of-knowledge of the reader. Conceivably, the memo
reader could be the person who specified the program alternatives. In that case, you
wouldn’t need to describe the program too much. On the other hand, a succinct summary
of the program in the body of the memo itself would probably be helpful if the decisionmaker-reader isn’t familiar with the program. As a general proposition, some description
of the alternatives is a good idea since a decision will likely have to be cleared by more than
one person, and not all of them will be familiar with the details.
Appendix 2 is attached. It shows all of the calculations. If this was real life, it would also
have to more fully describe the assumptions of the analysis. For example, the assumption
that contractor option will increase the building stock, thereby enabling property tax
revenue to be treated as a pure transfer. Etc.


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