Drink Driving Limits and Cost/Benefit Analysis

The recent debate surrounding Minister for Transport Noel Dempsey's proposals to reduce the legal alcohol limit for drivers from 80mg to 50mg of alcohol per 100ml of blood provides an interesting insight on the economist's tool of Cost/Benefit Analysis.

On one side we have the Minister arguing that the benefits of the measure will be the lives saved as a result of the new law. On the other side we have TDs such as Mattie McGrath (FF, South Tipperary) suggesting that the costs of the new measure will be increased isolation of people, especially older people, in rural Ireland.

As a decision-making tool the decision rule in a Cost/Benefit Analysis is relatively simple. Once all the relevant costs and benefits have been monetised an action should be taken if the value of the benefits exceeds the value of the costs. That is, the action or policy results in a net benefit or gain to society.

The current drink driving debate highlights one the major difficulties in appropriately undertaking a cost/benefit analysis: monetising the benefits. The proposals put a reduction in deaths and injuries from road accidents versus increased isolation of the rural community as the opposing costs and benefits. These are factors that have no direct monetary value and so must be valued indirectly if a true cost/benefit comparison is to be made.

Each side will also seek to increase the values supporting their view and reduce the values that should be placed on the factors on the opposite side. For example if we consider the public mutterings of those against the measures we can see that they have argued that the benefits should be lower and the costs of higher.

They have suggested that the true figure for the reduction in road deaths is lower than what is the Minister has presented. Mattie McGrath has also argued that a drink or two has a relaxing effect on people and can make some people better drivers, a loss which increases the costs of the measure. On an interview on Newstalk he said, "some people, if drink is such a sedative, it can make people who are jumpy on the road, or nervous, be more relaxed".

Looking at those backing the measure European Transport Safety Council director Antonio Avenoso has said that:

"...saving lives was more important than any perceived threat to rural social life.

We should also not forget that rural communities have also been shattered and
devastated by lives lost, by people who have brain damage and by people who have
long-standing injuries because of traffic accidents due to drink driving."

The Road Safety Authority has gone a step further and half done one half a Cost/Benefit Analysis. They have argued that the benefits of the new regulations can be valued at €70 million per year. This is as a result of a reduction in accidents leading to 10 fewer deaths, 100 fewer injuries and less damage caused. Cliona Murphy of Alcohol Action Ireland has argued that the costs of imposing the new rules should be zero.

"With regard to all alcohol-related issues, this is probably as clear-cut as it gets. I'm at a loss to understand why a person's right to have a pint and drive overrides my right to drive on roads free from alcohol."

Working out who is right or otherwise is a complex task and not the issue here. The aim here is to merely highlight the difficulties that arise when trying to undertake a cost/benefit analysis when monetising the factors cannot be done directly.

To finish we will take one claim and see if it stands up to scrutiny - the claim by the RSA that this measure will save 10 lives per year.

The key report on this issue is based on research done by Dr Declan Bedford et al for the HSE. The report which covers the three year period 2003 to 20055 is available here and a recent slideshow presentation of the report is available here.

According to the report 18 drivers were killed in the three year period who had a blood alcohol content of between 50mg and 80mg per 100 ml of blood. This is legal under current law but would be illegal if the proposed measures are introduced. This gives an average of six deaths per year. Four below the figure of ten as promoted by the RSA. Can we get there?

Thus far we have only included drivers. Other fatalities on the road occur among pedestrians/cyclists and passengers. Using figures in the report it is possible to suggest that about 1.5 pedestrian/cyclist deaths per year could be avoided if the new rules were implemented. This is found by multiplying the following numbers. Proportion of accidents in which driver alcohol is an issue (31%), proportion of these accidents in which blood alcohol is between 50mg and 80mg per 100ml (8%) and average number of pedestrian/cyclists deaths per year where pedestrian/cyclist alcohol is not an issue (57). A similar analysis for passenger deaths suggest that there would be two less passenger deaths per year if the blood alcohol limit was reduced to 50mg.

This puts the total number of deaths reduced at six plus one and a half plus two giving a total of 9.5. We're not too far off the quoted figure ten less deaths per annum. Can we find another 0.5?

In 35% of driver deaths no blood alcohol readings were taken or were not available to the researchers. It is likely that in some proportion of these cases alcohol was an issue but the data is not available to reveal this. In many cases tests may not be undertaken because there are clear reasons to suggest that such a test is unnecessary. Still, there are bound to have been a (small?) number of cases where data is not available but driver blood alcohol of between 50mg to 80mg per 100ml is present. We can assume that these cases will result in 0.5 road deaths per year.

We now have support for the RSA claim of a reduction of 10 road deaths per year that forms part of the €70 million per annum benefit if the new measures are introduced.

Is there an issue here?

YES! The RSA analysis is based on the assumption that the reduction in the limits will result in the elimination of ALL deaths that were a result of driver blood alcohol of between 50mg and 80mg. All of them!

If this is to true then it must be that there are no deaths above the current 80 mg limit. Of course not. 80% of killed drivers with alcohol had blood alcohol above 80mg. Of those with alcohol the average reading was 88.9mg per 100 ml.

How many deaths will be avoided if the blood alcohol limit is reduced to 50mg? In fact, the first question should be "will any deaths be avoided?". The answer to this question is probably "yes" but the number is undoubtedly less than ten, maybe even substantially so.

Do I know the answer? No. Just be careful what you read when it comes to pronouncements on a cost/benefit analysis!

Split or Steal?

Jasper Carrot teaches Game Theory.

The TV game show Goldenballs concludes with two contestants facing off in a situation that is a variation of The Prisoners' Dilemma. The main workings of the early part of the game are unimportant, what is of interest here is the final round.

Each contestant chooses a ball, either Split, which means they try and split the jackpot with the other contestant or Steal which means they try and steal the entire jackpot for themselves. There are three outcomes as follows:

• Both players choose Split: The winnings are split equally between them.
• One player chooses Steal, the other Split: The player who played 'steal' gets all the money.
• Both players choose Steal: No-one gets any money.

The conclusion of one such episode is shown in the following clip.



The problem is the same as The Prisoner’s Dilemma except it is not quite as pure. This is a one shot game, but the players are in the same room, in fact, they’re looking right at each other, their friends and family are watching and they are given the opportunity to convince the other person of their intention to either Split or Steal. There is more at stake than some money, their reputation amongst all people for one. On top of all of this they have been playing a game for the past half hour and have had the chance to betray each other already.

The similarities with the Prisoner's Dilemma are:

1. It is a game of cooperation (share) or defection (steal).
2. Decisions are made simultaneously.
3. It is a one shot game

The major differences are:

1. This is a zero-sum game.
2. The players can communicate.
3. Steal (defect) is only a weakly dominant strategy

Here is some analysis of the decisions involved:

The worst outcome in this game is for the players to both choose ‘steal’ as that would mean no one wins the jackpot. All other scenarios mean the full jackpot is given to at least one of the players. At initial inspection it may appear that the jackpot will be given out ¾ times and no jackpot a ¼ of the time. But the interesting thing with this game is that assuming all players behave rationally the outcome will actually always be that no one wins the jackpot (i.e. two steals).

If you put yourself in the position as a player, you can see how this works. There are two possible options that your opponent can choose (‘steal’ or ‘split’).

Take scenario 1 where your opponent chooses ‘split’. Here if you choose ‘split’ you will get half the jackpot, if you choose ‘steal’ you will get the entire jackpot. So obviously any rational person will choose ‘steal’ as this will maximise your winnings.

Take scenario 2 where your opponent chooses ‘steal’, in this scenario it is irrelevant whether you choose ‘steal’ or ‘split’ because either way you will get nothing. So given the scenario 2 decision is irrelevant (as ‘steal’ and ‘split’ both result in 0) your decision should be based purely on scenario 1 where it has already been illustrated that any rational person will choose ‘steal’.

So the optimum strategy for any player is ‘steal’! Of course the problem with this is that your opponent has the same options as you and therefore will pick ‘steal’ which means the game ends in two ‘steals’. So going back to the game show assuming that all participants are rational human beings the first 55 minutes of the show are irrelevant because whatever the jackpot ends up being the result of the game will always end up with no one wining anything.

So what actually happens when people are faced with this choice on the show. The show is currently half way through its sixth series and in the five and a half series to date 253 episodes have been broadcast. Data on the 40 episodes in the first series are available here. This gives us a sample of 80 people who were presented with the Goldenballs Dilemma. The average jackpot competed for in the 40 episodes was £12,975.76.

Even though we have shown that 'steal' is the weakly dominant strategy of the 80 contestants, 42 of them chose 'split', or just over 52%, with the other 38 contestants obviously choosing 'steal'.

There were 12 episodes in which both contestants chose 'split' and the jackpot was divided. The average split jackpot was £9,245.49. That leaves 18 people choosing 'split' who had 'steal' played against them and ended up with nothing. The average stolen jackpot was £17,807.14. In the remaining ten episodes both contestants choose 'steal' and the jackpot was lost. The average lost jackpot was £8,742.25.

So the outcomes were:

Both players choose Split:- 12 episodes (30%) Average jackpot = £9,256.49
One player chooses Steal, the other Split:- 18 episodes (45%) Average jackpot = £17,807.14
Both players choose Steal:- 10 episodes (25%) Average jackpot = £8,742.45

Putting an Economics Degree to Work

Robert Mugabe, President (Dictator?) of Zimbabwe does not suffer from a shortage of education. In the 1950s, 60s and 70s he earned no less than seven degrees. These are not honorary degrees of which he has many, though some have since been revoked.

Mugabe has three Bachelors degrees, in Economics, Education, and History and Literature. While imprisoned for 11 years from 1963 to 1974 he completed four degrees by correspondence which were awarded by the University of London. He gained a Masters degrees in Economics, a Bachelors degree in Administration as well as two Law degrees.

Thus with two Economics degrees including a Masters one would expect that Mugabe would have a grasp of basic economic concepts. One example should be enough to question the value of these degrees.

Question: What is the solution to rampant inflation?
Mugabe: Print more money and introduce price controls.

Here is a stunning image that brilliantly illustrates that Mugabe has little understanding of the role of property rights and the effect of The Tragedy of the Commons on economic outcomes. This image gives an aerial view of farmland in Zimbabwe.

The Centre for Global Development provides a handy interactive tool using this and other images. They also provide the following analysis which gives a nice pointer on causality.

Land reform begun in Zimbabwe in 2000 was supposed to redistribute land from predominantly white-owned commercial farms to much poorer black farmers who toiled on communal lands. Proponents argued that the redistribution was necessary because commercial farms occupied the most fertile lands, leaving only dry, dusty land for communal use. This rationale reflects confusion about cause and effect regarding land ownership and land quality. In the "Before" photo below, the dry communal lands on the left are sharply delineated from the green private farms dotted with lakes and ponds on the right--so sharply that soil quality and rainfall are unlikely to explain the difference. Now click the arrow to see what happened after land reform. The dams and irrigation systems on the private farms collapsed, making them look more like communal lands, to the detriment of all.

This is not the only aerial image that shows the power on institutions in determining economic outcomes. Check out this night time image of the Korean peninsula.

Finally there is the suggestion that it is not the fault of Robert Mugabe and other failed economists that they have such a poor understanding of the subject. The Economic Naturalist , Robert Frank in a 2005 New York Times column wrote the following:

Virtually all economists consider opportunity cost a central concept. Yet a recent study by Paul J. Ferraro and Laura O. Taylor of Georgia State University suggests that most professional economists may not really understand it. At the 2005 annual meetings of the American Economic Association, the researchers asked almost 200 professional economists to answer this question:

"You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (a) $0, (b) $10, (c) $40, or (d) $50."

The opportunity cost of seeing Clapton is the total value of everything you must sacrifice to attend his concert - namely, the value to you of attending the Dylan concert. That value is $10 - the difference between the $50 that seeing his concert would be worth to you and the $40 you would have to pay for a ticket. So the unambiguously correct answer to the question is $10. Yet only 21.6 percent of the professional economists surveyed chose that answer, a smaller percentage than if they had chosen randomly.

When they posed their original question to a large group of college students, the researchers found that exposure to introductory economics instruction was strikingly counterproductive. Among those who had taken a course in economics, only 7.4 percent answered correctly, compared with 17.2 percent of those who had never taken one.

Maybe Mugabe would be better able to deal with Zimbabwe's hyper-inflation if he'd never taken an Economics degree!

Hot dog, anyone?

Here is a very interesting article about a failed hot-dog vendor in New York. He missed rent payments on his license to sell hot-dogs from a cart on the steps outside the Metropolitan Museum of Art. What's so interesting about this? Well his annual rent was $642,696!!!

Hot dog heartache has come to the Metropolitan Museum of Art, where the Parks Department on Friday evicted a weiner vendor who couldn't pay his $53,558 monthly rent.

The frankfurter failure is Pasang Sherpa, 51, of Long Island City, who agreed late last year to pay almost $643,000 annually for the right to sell food and drinks from carts on either side of the iconic steps. He fell $310,000 behind on rent and the city has seized $170,000 in Sherpa's assets.

A worker at one of the carts who was hanging up his tongs Friday night said it brought in just $1,000 to $1,500 a day - not enough to cover the sky-high rent. Sherpa was the highest bidder last year when the Parks Department auctioned the right to sell hot dogs there. It is the most lucrative spot in the city, in front of one of New York's top tourist attractions with no nearby stores or restaurants.

The same paper reports that Sherpa got a job from one of his fellow cart operators, Dan Rossi, and notes their problems with unlicensed vendors.

"He's gonna work for me now," said Rossi. "Nobody's gonna touch him now without talking to me."

"The guy was crying. They pushed him out," Rossi said.

"Yeah, I'll work for him now," Sherpa said yesterday. "It's better than nothing."

"Last night I couldn't sleep," he said. "I've got kids who have to go to college. I don't know what I'm going to do."

Sherpa and Rossi say the city needs to do a better job keeping so called "black market" hot dog vendors away from the Met. "As soon as they pulled Sherpa's cart out yesterday, all these guys just pulled in. The city has to enforce the law," said Rossi.

These unlicensed dealers offer dogs and drinks for less money than the legit businessmen, whose prices are set by the Parks Department. "I sell water for $2 and the others sell it for $1," he said. "If I charged $10 a hot dog maybe I could compete."

Back in January The New York Post reported the agreement that Sherpa would be selling hot dogs at $2 dollars each. That's almost 320,000 unit sales just to cover the rent cost. To put it into perspective consider the comparison to the number of minutes in a year - 525,600. To cover the rent Sherpa needs to sell "one hot dog every 1.6 minutes — and not just during lunch or other normal meal times. Rather, it is assuming Mr. Sherpa (or someone else working for him, presumably for pay) is manning the cart 24 hours a day.

In the same article The Post also reports that altough Sherpa had won the auction to the rights to both the South and North sides of the entrance steps he had paid more than €80,000 for the Northside rights even though there is a little more than 30 yards between them!! The combined rent from the auction for the previous year before rookie Sherpa entered the fray was $415,000.

Hot Dog Cart News (who?) are obviously a cheerleader to the industry and suggest that this may not have been such a crazy deal:

How many hot dogs, chips, and sodas do you need to sell just to break even? Let’s do the math:

Keep in mind this is a premium tourist destination and there is no where else to eat. I’m guessing that a dog, chips and soda would sell for $8. If so, Sherpa needs to serve 80,338 meals to break even. That’s less than 2% of the 5 million folks who walk right by his carts on the way in or out of the Met each year. Granted he has other overhead to cover, but nothing even close to those rent payments. If he sells to just 10% of the tourists he will gross…

Four million dollars a year. I’m getting dizzy.

This analysis is full of holes. What about the capital, labour and materials costs that would be incurred in order to sell the 80,338 meals to cover the rent? The rent is only an element of the fixed costs. The carts, staff and hot dogs do not come free and form part of the variable costs. It is these that determine the break even level. So how did our hero get into trouble? Hot Dog Cart News have the answer:

But here’s a lesson. Before you sign anything, make sure all your ducks are in a row. Only one of Sherpa’s carts passed the health department inspection, and his coveted north entrance will be blocked by construction for months. Again, holy #$&* ! Wouldn’t you have done a little more due diligence before jumping into the big leagues? So now he doesn’t want to pay. Big surprise.

This little case study provides material and examples for a plethora of economic concepts:

• economic rent, super-normal profits and rent seeking
• consumer surplus and producer surplus
• defining, allocating and the value of property rights
• market structure and barriers to entry
• fixed and variable costs
• the short run and long run shutdown decisions
• ad rem(per unit) versus lump-sum (fixed) charges
• risk and uncertainty
• effects of regulation and the value of licenses
• allocative (in)efficiency of a planned economy
• competition ($1 water) versus monopoly ($2 water)

and probably most evidently of all

• auctions and the winner's curse

Tim Harford, in The Undercover Economist, analyses a similar example when it looks at coffee shops, their location and the price of a cappuccino in the first section of the opening chapter which is called "Who Pays for Your Coffee?". You can read the first few pages from this chapter here.

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