NIST

PUBLICATIONS REFERENCE

AlllOt 13SS8M

NBSIR 75-948

ECONOMIC ANALYSIS OF THE

NATIONAL MEASUREMENT SYSTEM

Barry W. Poulson, Editor

Department of Economics

University of Colorado

Boulder, Colorado

A report from the 1972-75

Study of the National Measurement System

by the NBS Institute for Basic Standards

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,(jJ^U September 1977

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NBSIR 75-948

ECONOMIC ANALYSIS OF THE

NATIONAL MEASUREMENT SYSTEM

Barry W. Poulson, Editor

Department of Economics

University of Colorado

Boulder, Colorado

A report from the 1972-75

Study of the National Measurement System

by the NBS Institute for Basic Standards

September 1977

U.S. DEPARTMENT OF COMMERCE, Juanita M. Kreps, Secretary

Sidney Harman, Under Secretary

Jordan J. Baruch, Assistant Secretary for Science and Technology

NATIONAL BUREAU OF STANDARDS, Ernest Ambler, Acting Director
FOREWORD

The concept of a National Measurement System has, for many years,

provided a useful focus for the considerations important to physical

measurements in our technology intensive economy. Dr. R. D. Huntoon,

in his October 6, 1967 article in Science , emphasized the basis for a systems viewpoint in interrelated measurements activities and the idea

has continued to evolve. Today, we think of the U.S. National Measurement

System in terms of all the intellectual, functional and institutional

activities which involve measurements throughout our society. Moreover,

we seek to understand more completely the structural nature of this

system and its architectural needs.

There have been a number of approaches to the study of our national

system for physical measurements. The present series of studies was initiated in 1972 by Dr. Ernest Ambler, then Director of the Institute

for Basic Standards. It was Dr. Ambler's purpose to organize the essential information necessary for the effective management of NBS resources

and to promote the direct interaction between IBS staff members and the

communities of users they serve.

This document reflects the results of the intensive studies carried

out during the period from 1972 - 1975. It is important to recognize

that the National Measurement System is extremely complex having widely

distributed elements and impacts. The detailed analysis of this system

is well beyond the state-of-the-art of econometric modeling, and therefore, any study, no matter how intensive, is necessarily incomplete.

Nevertheless, the information which is now in hand provides an important

addition to our capability for planning and implementing the programs

of IBS. It also represents a growing foundation upon which we can continue our efforts to build a more effective structure.

A. 0. McCoubrey

Director, Institute for Basic Standards

National Bureau of Standards

September 1977

ii
PREFACE

This report summarizes several attempts over the past ten years to describe or evaluate economic aspects of the physical measurement system

as seen at the National Bureau of Standards. With exceptions noted in the

text, this report is a summary of several, mostly unpublished, studies done

at the National Bureau of Standards. Publication of this summary provides

interested persons an overview of some fragmentary work, much of which has

not been critically evaluated. Hopefully, this will stimulate further

scholarly work in the economic evaluation of the National Measurement System.

The authors cited in the bibliography are the basic source of data and

concepts presented in this report. Assistance of the following economists

who served as consultants to authors of the microstudies of the National

Measurement System, conducted by the NBS Institute for Basic Standards,

is acknowledged here with appreciation: Mary A. Holman, Charles T. Stewart,

and James R. Barth of George Washington University; James T. Bennett of

George Mason University; Bernard Udis and Charles W. Howe of the University

of Colorado. Responsibility for the text of this report rests with the

editor.

Barry W. Poulson

Department of Economics

University of Colorado

September 1977
CONTENTS

FOREWORD 11 PREFACE ii1

EXECUTIVE SUMMARY 1 1. INTRODUCTION 3 1.1 Background and Purpose of Report 3 1.2 Economic Characteristics of Measurement 4

2. MEASUREMENT IN THE U.S. ECONOMY ^. . . J. . . . . 7 2.1 Economic Dimensions of the National Measurement System . . . 7 2.1.1 Economic Cost of Physical Measurement 7 2.1.1.1 Expenditures for Physical Measurement. 7 2.1.1.2 Industries Ranked in Terms of Measurement Intensity 7 2.1.1.3 Measurement Equipment 7 2.1.2 Economic Impact of Metrication 8

2.1.2.1 Net Costs of Metrication 8

2.1.2.2 Benefits of Metrication 9 2.2 Economic Change and the National Measurement System 9 2.2.1 Measurement Activity and the Information Sector 9 2.2.1.1 Information of Knowledge Production and Economic Growth 9 2.2.1.2 Measurement as a Component of the Information Sector 10

2.2.2 Measurement Activity and Changes in Industrial Production 10

2.2.2.1 Measurement Intensity and Changes in Output and Productivity

by Industry 10

2.2.2.2 Measurement Intensity and Changes in Industrial Structure. ... 12

3. ECONOMIC ANALYSIS OF COSTS AND BENEFITS OF MEASUREMENT IN THE PRIVATE SECTOR 14

3.1 Economic Rationale for Measurement Activity in the Private Sector 14

3.1.1 Introduction 14

3.1.2 Measurement in Production 14

3.1.3 Measurement in Consumption 14

3.1.4 Measurement in Sales Transactions .15

3.2 Case Studies of Costs and Benefits of Measurement in the Private Sector 15

3.2.1 Introduction 15

3.2.2 Case Studies of Measurement in Production 16

3.2.3 Case Studies of Measurement in Consumption 17

3.2.4 Case Studies of Measurement in Sales Transactions 19

4. ECONOMIC ANALYSIS OF COSTS AND BENEFITS OF MEASUREMENT IN THE PUBLIC SECTOR 21 4.1 Government and the National Measurement System 21 4.1.1 Introduction 21 4.1.2 Economic Rationale for Government Measurement Activity 21 4.1.2.1 Measurement as a"Public Good" 21 4.1.2.2 Measurement and Consumer Protection 22

4.1.2.3 Measurement and Health and Safety 22

4.1.2.4 Measurement and International Trade 22

4.1.2.5 Measurement Research and Development 23

4.1.3 Public Production of Measurement and Improvements in Measurement 24

4.2 Costs and Benefits of National Bureau of Standards Activities in the

Measurement System 25

4.2.1 Introduction 25

4.2.2 Maintaining Basic Standards 25

4.2.2.1 Background 25

4.2.2.2 A Case Study of the Basic Standard for the Lumen 25

4.2.2.3 Other Basic Standards 27 4.2.3 Measurement Research and Development 28

4.2.3.1 Costs and Benefits of Government Sponsored Measurement

Research and Development 28

4.2.3.2 Exploratory Studies of Benefits and Costs of Selected R&D

Projects of NBS 28

4.2.4 Measurement Services of the National Bureau of Standards 31 4.2.4.1 Services in the National Measurement System 31 4.2.4.2 Calibration and Dissemination Services 31 4.2.4.3 Provision of Standard Reference Materials 33

4.2.4.4 Publications 34

5. CONCLUSIONS 35

REFERENCES 35

i v

I
LIST OF TABLES

Table 1. Measurement intensity of principal using industries, 1963 6

Table 2. Value of output of measurement equipment 6 Table 3. Productivity and output of measurement-intensive industries 12

Table 4. Summary of economic benefits and costs of selected NBS projects, 1967. . . 30

Table 5. Comparison of gross and net benefits and benefit-cost ratios for

selected NBS projects through 1970 30

V

ECONOMIC ANALYSIS OF THE

NATIONAL MEASUREMENT SYSTEM

Barry W. Poulson

Department of Economics

University of Colorado

EXECUTIVE SUMMARY

The first part of this study deals with the

concept of measurement for economic analysis,

the quantitative dimensions of measurement in

the economy, and the relationship between

measurement and economic change. Measurement

goods and services yield benefits to users by

extending the physical, human senses in providing information about the properties and

characteristics of physical objects and phenomena. Measurement information is ubiquitous

in the economy; it is used by producers and consumers and as an input at the interface

between buyers and sellers. The making of

measurements is resource using, the instruments, labor, and other resources needed to

make measurements each have their costs and

these costs represent the total cost of the

national measurement system. The National

Bureau of Standards has begun to study the macro economic dimensions of the national

measurement system, and one approach in this

study is a measure of the cost of labor and

equipment used for making measurements. The

cost of these resources used in making mea- surements was estimated at $36 billion or 6%

of GNP in 1963. Each of the 78 major industrial sectors incurred substantial expenditures for measurement equipment and labor in

1963. Industries that have experienced the

most rapid rates of growth and productivity

advance also tend to be measurement intensive,

i.e., measurement expenditures are high relative to value added by these industries. The

Metric Study by the National Bureau of Standards also provided insight into the macro economic dimensions of the transition to the

metric system. The cost of conversion to the

metric system over the period 1970 to 1980 was estimated to equal 10% of the total cost of

measurement in the economy in those years.

The second part of the study examines the

measurement system from the standpoint of the

private sector, including the economic rationale for n;easurement by producers, consumers,

and in exchange between producers and consumers; and case studies of the costs and benefits of measurement in the private sector.

While it is impossible to analyze the benefits

of the total national measurement system, it

is possible to examine benefits and costs of

marginal changes in the measurement system.

r 1977

The third part of the study deals with the

role of government in the measurement system,

incorporating an economic rationale for mea- surement activities by the public sector, and case studies of costs and benefits of activities by the National Bureau of Standards.

Information provided by measurement is a public or collective good to the extent that

the information provided by a single measure- ment can be given to any number of people

with no one suffering a loss of the information. The production of measurement information is sometimes characterized by increasing

returns; producers of measurement information

often use specialized equipment and personnel

who make relatively few measurements. The

marginal cost of taking an additional measurement likely is less than the average cost, and

the cost of disseminating the measurement information from one person to another is probably trivially small compared to the cost of

making the initial measurement. Finally,

measurement is accompanied by external economies in such areas as consumer protection,

health and safety, international trade, and

research and development. Under the atDOve conditions the private market system may not

allocate resources to the measurement system

efficiently and government intervention in

the national measurement system may increase

the general welfare.

The role of the National Bureau of Standards in the national measurement system is

based on provisions in the Constitution and

on enabling legislation designed to implement

those provisions. This study discusses the

costs and benefits of National Bureau of Standards activities in maintaining basic standards, in conducting measurement research and

development, and in providing calibration,

dissemination, and publication services. The

costs and benefits of selected National Bureau

of Standards projects are quantified, including large force calibration, time and frequency service, coaxial connectors, standard ref- erence materials for iron and steel, standard

reference materials for metals in oil, semiconductor resistivity, and LPG meter calibration. While none of these studies satisfies

the conditions of rigorous cost benefit or

cost effectiveness analysis, they do provide

insight into the economic role of the National

Bureau of Standards in the national measurement system.

1. INTRODUCTION

1.1 Background and Purpose of Report

This report is a comprehensive summation of

all relevant work known to NBS on the state of

the art of economic analysis of the national

measurement system. It is written for a mixed

audience of economists and physical scientists,

in an attempt to bridge a gap between economics and the physical sciences. Therefore,

for the economist the economics content may

seem unnecessarily tutorial, and for the physical scientist the analysis of physical mea- surement may appear elementary. The report

will have achieved its purpose if each achieves

a better understanding of the other's contributions towards understanding the economic

significance of the national measurement system. The "National Measurement System" is a concept that has developed within the National

Bureau of Standards over the past decade or more [1].* Today, we use the term national

measurement system to include all of the activities and mechani sms--i ntel lectual and operational, technical and institutional--used by

this country to produce the physical measurement data needed to create the objective,

quantitative knowledge required by our society.

During the late 1960's, several studies were

undertaken within NBS of the economic aspects

of this system [2,3,4]. When the 1972-75 study

of the national measurement system was initiated within the NBS Institute for Basic Standards, stress was placed on achieving a significant economic analysis of the system [5].

A macro economic study of the system was undertaken by NBS staff economists [6,7,8]. The

NBS scientists and engineers who undertook

"microstudies" of specific measurement areas were asked to develop substantial economic data

regarding their areas of measurement. A group

of economists was asked to review their interim

reports and to suggest modifications in the

studies and reports. ''" This present report sum- marizes the major results of all of these

studies, within a general framework of economic

theory designed to make the resulting manu- script comprehensible to both economist and

physical scientist.

* Figures in brackets indicate the literature

references at the end of this paper.

t The group of economists included Professors

Charles T. Stewart, Mary A. Holman, James R. Barth, and James T. Bennett of George Washington University, Washington, D.C.; and

Professors Barry W. Poulson, Bernard Udis,

and Charles W. Howe of the University of

Colorado, Boulder, Colorado.

Following a brief introduction to the economic characteristics of measurement activity,

the study is divided into four sections. Section 2 explores the economic dimensions of

measurement activity in the U.S. economy. The

total cost of physical measurement is estimated,

and the impact of metrication on the cost of

physical measurement is discussed. The relationship between measurement activity and eco- nomic change is examined in several ways: first,

measurement is related to changes in the total

information sector; secondly, measurement intensity by industry is related to changes in industrial output, productivity and industrial structure.

Section 3 of the study moves from a description of the macro economic dimensions of

measurement activity in the economy as a whole

to an analysis of the costs and benefits of

specific measurement activities in the private

sector. The transition from a macro economic

perspective to a micro economic perspective

is necessitated by the fact that it is difficult to analyze the total benefits of the

national measurement system as a whole. It

is possible, however, to examine costs and

benefits of marginal changes in specific mea- surement activities in the private sector.

In the private sector, measurement information is used by producers of goods and services, by consumers in satisfying their wants

and needs, and in the sales transactions

between producers and consumers. Case studies

of some of the costs and benefits of measure- ment in each of these functions are taken from

the micro study reports of the national mea- surement system study.

Section 4 shifts from the analysis of mea- surement activity in the private sector to

measurement activity in the public sector.

The economic rationale for measurement activity in the public sector is discussed. Case

studies of some of the costs and benefits of

measurement activities of the National Bureau

of Standards are surveyed: maintaining basic

standards, measurement research and development, calibration and dissemination services,

the provision of standard reference materials,

and publications.

The concluding Section 5 discusses some of

the limitations of the existing literature on the economic analysis of the national measurement system and some suggestions for further

research in this field.

3
1.2 Economic Characteristics of Measurement

The National Measurement System for the

measurement of physical quantities is described in this series of reports as having

five interacting levels: (1) conceptual system of measurement phenomena, quantities,

and units; (2) basic technical infrastructure;

(3) realized measurement capability; (4) dissemination and enforcement network; and,

(5) organizational input-output transactions

in the measurements marketplace. While these

levels are interdependent, economic interest

here centers in the 5th level because it is

here that resources are utilized by suppliers

to generate measurement goods and services

for users. Essentially, the resources in

question are the instruments, reference materials, and skilled manpower that constitute

inputs into the measurement system. The

making of physical measurement is an economic

activity which, because it is resource using,

is costly. The instruments, labor, and other

resources needed to make measurements each

have their costs and these costs represent

some part of the total cost of the national

measurement system.

Measurement goods and services yield benefits to users by extending the physical, human senses in providing information about the

properties and characteristics of physical objects and phenomena. Reading a measuring instrument creates information and, hence, there

is no doubt that such an instrument qualifies

as a knowledge-producing device. If the

"reader" of the instrument grasps its message

and, on this basis, acts in order to influence

the measured magnitude, he is what is now called a "feedback link" who detects a deviation from a standard and corrects it. It is

often possible to replace the human link by

a mechanical (or electrical, etc. ) device which

actuates the same correcting operation. For

example, the human heat control operator may

watch a thermometer and open a valve or manipulate a switch as soon as he notices that the room temperature has fallen below 70° Fahrenheit. The thermostat is an automatic heatcontrol operator, acting upon the information

received from the thermometer. The point is

that the measuring device transmitting the information and actuating an adjustment operation deserves to be called part of an information macfiine. After all, if the automatic

actuator should ever stop working, say because

of a break in the connection, the human operator could step in, receive the information con veyed by the measuring instrument and act to

correct the observed deviation.

Viewing measurement as a form of information, we find that it is ubiquitous in the

economy; it is used as an input in production,

it is used in consumption by consumers, and it

is used at the interface between sellers and

buyers. The information provided by measurements is valuable when used as a factor of

production or used by consumers because the

information allows more efficient use of non- measurement resources. Information from mea- surement at the interface between sellers and

buyers promotes efficient use of resources as well as increased equity in sales transactions'

Having noted that measurements convey infor^

mation, we can go further toward defining the

economic characteristics of measurement by observing that different measuring devices can

be used to measure the same phenomenon and

the resulting measurements are often treated

differently. For example, the width of a steel block can be measured either with an ordinary ruler or with a machinist's caliper.

Though both instruments measure the same attribute, we generally trust the caliper reading more than that of the ruler. Further, the

caliper can probably give a reading to more accuracy and precision than can the ruler. In short, the information content of the caliper

reading is higher or better than that of the

ruler. Thus, it seems reasonable to consider

a change from a ruler to a caliper to be a change which provides improved measurement

characterized by higher quality. Further, we

can expect that some people would be willing

to pay a higher price for the caliper measure- ment than for the ruler measurement because of

the better quality information. We can also

note that some people would not pay a higher

price; but this fact simply implies that

different people do different things with the

information they get from a measurement. Some

people can use all the information provided to

them by a caliper while other people in other

circumstances would be quite satisfied with

the information from a ruler. Thus, for this

second group of people, the advent of the

caliper is really of little consequence.

The ideas just presented reveal several

economic characteristics of measurement that

need further development. First, measurement

information is usually expressed in the form

of a quantitative statement about some physical phenomenon, as well as a related statement about the reliability of this information.

Improvements in measurement then provide

better information either in the statement

about a physical phenomenon or in the reliability of the statement. Whereas technical

improvements usually are embodied in physical

capital goods, improved measurement yields

better information without necessarily a physical change in the equipment used to produce the better information, although

improved instruments are often the way of

gaining improved measurements. The heat

control operator in our earlier example may

also use the same measurement instrument.

4
i.e., a thermometer, to measure not just one temperature, but a range of temperatures over

a given time period. This extended measurement set requires no technical improvement in

the measuring instrument per se, but rather

an amplification of labor or cost applied to

the system or process of interest. In short,

it is information (including certainty or reliability of that information) which is the

aim of measurement activity . The latter

obviously consists of theory (conceptual

appropriateness of the measure), instruments

or techniques, and intensi veness of labor

appl ied.

The second characteristic of measurement

revealed in the above illustration is that

improved measurement may not yield benefits

in an economic sense. The value of improved

measurement to the user depends on whether

this information provides him with a better

way of reaching a given objective. It is

usually assumed that consumers seek to satisfy wants through consumption; the objective

is to maximize the satisfaction of wants.

Producers of goods for sale in the market

wish to maximize profits (total revenue less

total costs). The benefits of measurement

information to each will depend on the extent

to which this information contributes to want

satisfaction or profit maximization respectively, and the demand for measurement

information is derived therefrom.

Finally, in determining both the costs

and benefits of changes in measurement, it

is necessary to distinguish between costs

and benefits to individual users and to

society--the latter may not equal the sum of

the former because complex secondary effects

in the economic system may exist. Furthermore, aggregate costs and benefits of changes

in measurement must be determined with re- spect to goals of society, some of which may

be economic, political, humanitarian or technological. The distinction between benefits and costs to individuals and to society

is especially important in the economic analysis of changes in measurement financed in

the public sector. Even when government

measurement activities can be justified in

terms of legislative authority and economic

efficiency criteria, those activities may be

inconsistent with other social goals such as the freedom of private individuals or organizations to pursue their own interests as they

see them. [1,4,9,10,11,12,13].

5
Table 1. Measurement intensity of principal using industries, 1963

(ranked by amount and percent of value added by measurements)

Industries Ranked by Dollar Industries Ranked by Percent

Amount of Value Added of Value Added

Rank Industry Value Added Rank Industry Percent

1 Government (78, 79, 84)"^ $11 ,342 M 1 Radio & TV (67) 27,.0

•0L 1 raae ^ ) t , cOD o

c. bovernmeni, ^/o,/y,c5fy 20,.6

3 New Construction (11) 1 ,348 3 Aircraft Mfg. (60) 16 .8

4 Elec. , Gas & Water Util .(68) 1,149 4 Electronic Comp. (57) 16,.5

5 Aircraft Mfg. (60) 1,106 5 Office Equipment

and Computers (51

)

16 .4

6 Transport & Warehsg. (65) 981 6 Radio, TV and Commun.

Equipment (56) 16,.3

7 Radio, TV & Commun.

Equipment (56) 970

7 Plastics (28) 12,.2

8 Finance & Insurance (70) 817 8 Chemicals (27) n,.4

9 Telephone & Telegraph (66) 809 9 Elec. Trans. & Dist.

Mfg. (53) 10,.6 10 Primary Iron & Steel (37) 802 10 Textiles & Floor

Cover (17) 10 .3 Numbers in parentheses denote the standard industrial sectors of the 1963 input-output tables.

Source: Howard E. Morgan, "The Economic Cost of Physical Measurement" [8]

Table 2. Value of output of measurement equipment

Producing Industry ' Total Output

SIC Code Industry (million dollars)

1941 Fire Control Equipment $ 228.0

3576 Scales and Balances 103.6

3586 Measuring and Dispensing Pumps 172.8

3611 Electric Meas. Instr. & Test 938.5

Equipment

3622 Industrial Controls 819.1

3693 X-Ray Apparatus 154.6

3811 , Engineering & Scientific Instr. 864.6

3821 Mechanical Meas. & Control Instr. 1279.0

3822 Automatic Temperature Controls 561.0

387 Watches and Clocks 557.0

Total $5678.3

Source: Howard E. Morgan, "The Economic Cost of Physical Measurement" [8]

6
2. MEASUREMENT IN THE U.S. ECONOMY

2.1 Economic Dimensions of the National

Measurement System

2.1.1 Economic Cost of Physical Measurements

As part of the study of the national meas- urement system, the National Bureau of Standards attempted to estimate the cost of making

physical measurements. Estimates were made

of the cost of both the labor [6,7,8] and the

equipment [8] used for making measurements in

the industrial and governmental sectors and

for the total United States economy. A number

of conclusions are offered:

2.1.1.1 Expenditures for Physical Measurements

The NBS studies by Pawlik and Morgan show

that the use of physical measurements is very

extensive [7,8]. Approximately $35.7 billion

or 6 percent of the 1953 Gross National Product (GNP) was generated by measurement related activity. Of this total measurement related GNP, $32.4 billion or 85 percent was ac- counted for by employee compensation; the re- mainder includes $2.5 billion in property type

income as rents, interest, proprietors income,

corporate profits and depreciation charges;

$0.7 billion was a result of indirect business

taxes [7,8]. In 1963 about $5.7 billion was spent for measurement related equipment [8].

The cost of this equipment cannot be summed

with the above estimate of measurement related

GNP because this would amount to double counting, i.e., part of the cost of this equipment

is the cost of measurement related labor and

capital inputs already included in the above

estimate.

The making of physical measurements is pervasive throughout the economy. Each of the

78 standard industrial sectors in the American

economy incurred significant expenditures for

measurement related labor and equipment. Consumers, government, and private firms each

spent significant amounts for measurement

related equipment.

2.1.1.2 Industries Ranked in Terms of

Measurement Intensity

In the NBS studies (see table 1), industries were ranked by both dollar amounts and

percentages of value added by measurements [8].

In 1963 government ranked first in terms of

dollar amount of value added by measurement

related activity, and second among industries

by percent of value added for measurement.

Government spent $11.3 billion or about one- third of the total expenditures for measurement related GNP. The Federal, state, and

and local government share of measurement

related GNP is substantially greater than

their share of total GNP. This estimate is

based on labor cost alone, since property

type income and indirect business taxes were

not included in the government's share of

measurement related GNP. However, the Federal

government bought $705 million worth of meas- urement equipment and state and local governments spent $75 million in 1963 for such

equipment. It is clear that government

accounts for a significant part of the total

cost of physical measurements, whether we measure this as a share of measurement

related GNP or in terms of expenditures for

measurement related equipment.

Wholesale and retail trade ranked second

($4.3 billion) among industries in dollar

value added by measurements. This apparently

is due to the large number of sales transactions involving the use of weights and measures . Construction ranked third ($1.3 billion)

in dollar value added by measurements. The

construction industry utilizes measurement

equipment extensively in the construction of

buildings, but the bulk of measurement expenditures is for labor making measurements in

construction.

The NBS studies showed that the service

industries in general (including government)

ranked high in terms of dollar amount of

value added for measurement activity. Service

industries such as trade, utilities, transportation, communication, and finance each spent

significant dollar amounts for measurements.

Radio and TV broadcasting, and government

also rank first and second, respectively, in

terms of the percent of value added accounted

for by measurement related activities. The

other industries that spent a relatively

large share of their value added for measurement are manufacturing industries that are generally regarded as industries that have

experienced rapid technological change, as discussed later in this report.

2.1.1.3 Measurement Equipment

Estimates of the value of output for the

measurement equipment producing industries were made in Morgan's study (see table 2) [8].

The largest of the measurement equipment industries is that making mechanical measurement and control instruments ($1.3 billion).

The largest buyer for this equipment was the

automobile industry, followed by aircraft

manufacturers and electric/gas/water utilities.

The second most important industry is

that which produces electrical measuring

and test equipment ($938.5 billion). This

equipment is sold primarily to federal and

7
state governments, to the electrical utility

industry, the telephone industry, and radio/

TV/communications equipment manufacturers.

Producers of engineering and scientific

instruments ($864.6 billion) and industrial

controls ($819.1 billion) rank third and

fourth respectively in value of output. The

remaining producers of measurement equipment

ranked considerably lower in value of output.

These industries produce equipment primarily

relating to the measurement of time, heat,

mass, or some mixture of basic measurements.

2.1.2. Economic Impact of Metrication

2.1.2.1 Net Costs of Metrication

The only other study which provides macro

economic data on the quantitative dimensions

of the national measurement system is the

Metric Study [14]. The Metric Study was a project by the National Bureau of Standards

to determine the effect on the United States

of increased world wide use of the metric

system. The Metric Study investigated 14 areas where metrication was expected to

have a major impact, and provides a unique

insight into an impending discontinuous

change in the national measurement system.

The investigations in each of the areas yielded estimates of the net costs of

conversion to the metric system, i.e. total

costs less benefits. In most cases the

separate total costs and total benefits of

conversion to the metric system were not

provided, and in some cases, such as the

study conducted by the Department of Defense,

total costs of conversion to the metric

system were estimated for a period of time

longer (30 years) than that used in other

studies. Nonetheless, it is possible to

aggregate these costs of conversion to the

metric system over the ten year period

1970-1980. This data is crude and somewhat

dated since the study was conducted in 1969/

70; therefore we refer to the estimates in

percentage terms.

The total net cost of conversion to the

metric system is estimated to be roughly

equal to the annual cost of measurement

activities described in the previous section [15]. If we accept these rough estimates

of the macro economic dimensions of the

national measurement system, we can say that

the average annual costs of the conversion

to the metric system over a ten year period

would equal about 10% of the total cost of

measurement in each of these years.

The major cost in converting to the metric

system is that estimated for manufacturing

industries. There, direct costs account

for about 45% of the total cost of conversion

to the metric system, while other costs such

as maintaining dual inventories add another

5%. No estimate of the net cost of metrication was made in the original study of the

non-manufacturing industries. Only 39% of

these latter firms indicated that they

anticipated cost changes associated with

metrication and for these firms the cost is

approximately 1% of value added. If we

assume that the costs of metrication relative

to value added for these firms are representative of non-manufacturing firms as a whole,

then the cost of metrication for this sector

estimated from data on value added is 5% of

the total cost of conversion to the metric

system.

Within the government sector, over 90% of

the cost of metrication is accounted for by

the Department of Defense. The cost estimated by the Department of Defense equals 33%

of the total cost of conversion to the metric

system; this figure is based on a 30 year

conversion period because of the long life

expectancy of much defense hardware and the

need to retain a capability in both customary and metric units over this period of

time.

The civilian agencies within the federal

government conducted a rather thorough survey of the net costs of metrication, which

aggregate to $0.6 billion. No metric study

report was prepared for state and local

government agencies. The metric study did

analyze metrication in education and reported that the costs in this sector were negligible. However, other state and local

government agencies are expected to incur

costs associated with metrication. Assuming

that these costs have the same ratio to state

and local (non-educational) budgets as the

ratio of metrication costs to the federal

(non-defense) budget yields an estimate of

$1.5 billion for the cost of metrication

for state and local governments.

These estimates of the costs of metrication

are subject to a wide range of error and

overall we suspect that the estimates are biased upward. The Department of Defense

estimate does not take into account benefits

from metrication that would offset to some extent the costs; and uses a different

(longer) time frame than the other studies.

The costs estimated for the manufacturing

sector may also be biased upward. The

companies chosen for the study were not

based on a random sample and the data base

appears to be rather weak. For example,

elimination of just two atypical companies

from the 158 companies sampled would lower

the estimated costs by some $0.4 billion.

The general opinion shared by those

involved in the National Measurement System

study is that the costs estimated in the

Metric Study are too high. This feeling

8
is supported by the British experience in

metrication, where apparently there was a strong tendency to overestimate the costs.

A recent survey by U.S. News and World Report

adds further evidence that metrication is

not only proceeding faster than expected,

but that the costs of metrication in the

private sector are substantially below the

original estimates. For example, Everett

Baugh, General Motors official in charge of

metric planning, states: "When General

Motors first analyzed the cost of going metric

in 1966, it was about as staggering as the

national debt. In 1972, we restudied the

cost based on going metric only with new models as they came out. That figure was just 28 per cent of the first estimate. In 1973, another study brought it down to 19

per cent. Now, practical experience suggests

that the real cost will be only 4 per cent

of the original estimate" [16]. The aggregate figure also appears high relative to

the total costs of measurement activity

noted in the previous section. Intuitively,

it is surprising that the costs of metrication should equal as much as 10% of the total

costs of measurement over a 10 year period.

However, given the upward biases and the

crudeness of the estimating procedures, the macro economic dimensions of the measurement

system suggested by the metric study are not

inconsistent with the estimates for the total

cost of measurement activity. For example,

the share of the costs of metrication

accounted for by the government sector is

about 36%; the share of the total costs of

measurement accounted for by the government

is 35%.

2.1.2.2 Benefits of metrication

The benefits of metrication are much more difficult to identify and estimate than the

costs of conversion. The Metric Study provides only fragmentary evidence on these

benefits. The study estimates annual benefits in education of SO. 5 billion based on labor time saved in such areas as teaching

of the cumbersome customary measurement

system and drilling in conmon fractions in

mathematics. The study also estimates

annual benefits in international trade of

SO. 6 billion resulting from the increased

competitiveness of American products. This

figure is probably overestimated to the

extent that resources drawn into trade may

result in a decline in domestic production.

The estimate of SO. 6 billion in trade was combined with the SO. 5 billion in education

to provide the only direct estimate of the

benefits of metrication of Sl.l billion.

It is not possible at this point to measure

directly the benefits from metrication. Given

the costs of metrication cited above, it is

estimated that total annual benefits required

to justify conversion to the metric system

are 53.5 billion. Given that the direct

estimates of benefits from metrication for

trade and education are $1.1 billion, then the

benefits in other areas would have to be $2.4

billion to justify conversion to metrication.

If metrication improves labor productivity

and reduces labor measurement time by only

about 5%, then the total benefits of metrication will be at least equal to that amount

required to justify the conversion. This

inference is not inconsistent with the direct

evidence of reduced labor time in education

resulting from conversion to the metric system.

In addition to the benefits of improved

labor productivity, there are other potential benefits not directly estimated in the

Metric Study. We expect the reduction in

inventories by "rationalization of the num- bers of standard sizes" to be a significant

benefit subsumed under the heading of

"housecleaning effect". A thorough reading

of the Metric Study reports shows that metrication will probably effect such a benefit;

and, although metrication is not requi red

in order to have inventory reduction, it may

very well not take place without metrication.

2.2 Economic Change and the National

Measurement System

2.2.1 Measurement Activity and the

Information Sector

2.2.1.1 Information or Knowledge Production

and Economic Growth

In our discussion of the concept of mea- surement as an operational system for economic analysis, we defined measurement as part

of the information sector of the economy. To

understand the relationship between changes

in the economy and in the national measurement

system, we can begin by examining changes in

the information sector. Fritz Machlup, in

a seminal study on the production and distribution of knowledge or information maintains that the share of knowledge production

in GNP has been increasing over the years and

that in recent years knowledge production has

been growing faster than GNP, implying that

its share in GNP has increased [10].

However, Machlup notes that the interrelationship between knowledge or information

production and economic growth is very complex

The most plausible relationship is that greater knowledge leads to increased productivity

of given resources and hence to faster economic growth. However, this causal chain from

9
knowledge-production to growth of total

product may also go in the opposite direction,

from higher incomes to higher expenditures

for knowledge.

Using the data for the mid-1950's Machlup

examined rates of increase in expenditures

for production in the various industries or branches of knowledge production [10]. He

found that the weighted annual average growth

of knowledge production was 8.8% compared

with a 5.1% rate of increase of GNP per year

over the same period. Over a longer period

extending back into the 1940' s he found that

the weighted average annual growth of knowledge production was 10.6% compared with a 5.9% rate of increase of GNP. The differences

in the rates appear even more impressive if

knowledge production is compared with the

production of everything else that is included

in GNP. If knowledge-production, the sector

comprising 28.7% of total GNP, increased by

8.8% (or 10.6% over the longer period) per

year, an increase of total GNP by 5.1% (or

5.9%) implies that the production of other

goods and services increased by only 3.7%

(or 4.1% over the longer period).

Machlup notes several important reservations in these comparisons. The period

examined is relatively short in terms of

longer term trends in economic growth; the

estimates are in current prices without

adjusting for differential rates of inflation

in the knowledge or information sector vis a vis other sectors; and no attempt is made

to adjust for qualitative changes in the

production of knowledge or in other goods

and services. In discussing these limitations, Machlup even suggests that because of

the non-measurabi li ty of the product, the

consequent lack of productivity data, and

the absence of market prices, one cannot

even state with assurance that an increase

in the expenditures for knowledge, relative

to GNP, will result in more knowledge being

provided to society. Nor can we say that

increased knowledge necessarily causes increase in GNP.

Despite these reservations more recent

evidence tends to support Machlup's suspicion that the share of knowledge production

in GNP has been increasing over the years.

Marc Porat has recently defined the information sector of the American economy in terms

of the extent to which labor is producing

output which may be classified as data,

information, or knowledge, or physical

outputs whose only real value lies in the

data, information, or knowledge that they

transmit or allow to be created [17]. Using

this definition of the information sector,

he finds that virtually all of the relative

increase in the output of service industries

in recent years is concentrated in this

information sector except for a significant

increase in the health care sector. He

finds that approximately half of all American

workers are engaged in the information sector. A recent study by the Stanford Research

Institute also reveals that the demand for

a number of information industries such as communications has been increasing at an accelerating rate [18].

2.2.1.2 Measurement as a Component of the

Information Sector

The national measurement system produces

information as part of the knowledge or information sector as defined in the above

studies. Our interest in the present study

is whether the production of measurement

information, like the production of information as a whole, has increased relative to total economic activity.

Machlup in his original investigation

of the information sector did isolate a group of industries producing measuring and

controlling instruments and found that they

experienced rates of growth generally higher

than those found in other sectors of the

economy. He found that sales of mechanical

measuring instruments increased more than

twenty times in the 15 years from 1939 to

1954, representing an annual growth rate of

22% [10]. Electrical measuring instruments

increased approximately fifteen times;

watches and clocks about four times, and

scales and balances about six times over the same period.

2.2.2 Measurement Activity and Changes

in Industrial Production

2.2.2.1 Measurement Intensity and Changes

in Output and Productivity

by Industry

In the previous section we discussed the

relationship between changes in the information sector and in measurement activity at

a rather high level of aggregation. In this

section we attempt to disaggregate total

economic activity into various industries and

to explore the relationship between changes

in output and productivity in these industries and in measurement activity.

One would expect greater measurement

intensity to be associated with newly developed products, and with new production pro- cesses. This is true for two reasons: new processes may not yet be routinized, and

new products may not have become fully standardized, so that more measurement is needed

than for traditional products and processes.

Also, new products and processes may be an outcome of, or take advantage of, improve10
ments in measurement capabilities which

established products and processes did not

require or could not use. Thus, measurement

intensity is expected to be associated with

product and process improvements. In the

machine tool industry, for example, new products and production processes are accompanied

by a more intensive use of measurement inputs;

however, once these products and processes

.become standardized and routinized throughout

manufacturing, they may ultimately reduce mea- surement inputs per unit of output. While

these inferences are consistent with the evi-

"dence accumulated in the micro studies, there

will be exceptions and in particular instances,

their validity remains to be demonstrated.

Product improvements should be reflected

in growth in industry output. Process improvements should be reflected in reduction

in industry cost, that is, by an increase in

productivity. New products should be re- flected in output growth of the industry

producing them, and (as well as improved

products) may result in productivity gains in

other industries, using the new or improved

products as inputs. The quantitative effects

depend in every case on the sensitivity of

demand: to lower prices, in the case of

process improvements; to improved performance,

in the case of product improvements; and the

extent of diversion of demand from old to new products, in the case of significantly

new products.

The appropriate economic indicators of the

effects of measurement intensity by industry,

growth in industry output and growth in industry productivity, are then only partial and

indirect indicators. Some effects impact on other industries; all are modified by the

characteristics of demand for the associated

products; and of course measurement is by no means the only factor of production influencing industry productivity or innovation.

Improvements in measurement capability, leading to the consequences indicated above, do

not imply greater measurement intensity.

They may permit given measurements to be

performed at much lower cost. Only improvements that make new and better measurements

•possible are likely to be associated with

greater measurement intensity. For example,

the micro study for surface finish shows how

improved characterization of surface finish

has resulted in more intensive use of measurement, usually as a substitute for the inputs

used to machine metal parts. Thus, the

effects of measurement intensity are only

part of the effects of measurement and of

improvements in its performance. Since mea- surement activities are only one of many

determinants of economic performance, the

relation cannot be expected to be strong.

Since expenditures on measurement depend on

the size of an industry, it is necessary to express them as a proportion of total industry expenditures. The result is an indicator

of measurement intensity.

The first attempt to explore the relationship between the growth of industrial output

and productivity and measurement intensity

was conducted in the National Bureau of

Standards by W. H. Eskite [2]. Eskite used census data to develop indexes of measurement intensity by estimating the per cent of

value added allocated to measurement activity

for eighteen manufacturing industries. He

then plotted index numbers of measurement

intensity with rates of growth in value added

for these industries. Casual observation of

this data led him to conclude that there is

a good deal of correlation between measurement intensity and the growth of value added

in those industries.

More recently, Howard Morgan of the

National Bureau of Standards estimated mea- surement intensity for 78 industries included

in the Input-Output tables for the United

States in 1963 [8]. The figures include both

capital and current expenditures for measurement equipment. Measurement intensity was also estimated for the same industries in

1967, but excluding labor costs (typically

the largest costs) and comparable estimates

excluding labor costs were made for 1963 [47].

In table 3 the average annual rate of

growth in output and in productivity for the

measurement intensive industries is compared

to that for all manufacturing. This evidence

supports the inference that measurement

intensive industries on the whole have ex- perienced more rapid rates of growth in

output and in productivity than other manu- facturing industries. However, this statistical exercise was hampered by lack of data

and difficulties in matching industries.

The industry structure of the Input-Output

tables, from which information on measurement

intensity was derived, does not match the

industry structure of data on output and

productivity on a time series basis. Estimates of total factor productivity by John

Kendrick are on a two-digit SIC (Standard

Industrial Classification) basis, and the

last year of observation is 1966 in most

cases [19]. Bureau of Labor Statistics man hour productivity data are on a four-digit

SIC industry basis, and are available to

1971 [20]. It was not possible at this time

to match Input-Output table industries with

Kendrick 's data, but it proved possible to

match exactly with BLS productivity time

series for 24 industries. The performance

of measurement intensive industries (those

with one per cent or more of their expenditures, excluding labor costs, allocated to measurement) compared with all manufacturing

11
Table 3. Productivity and output of measurement-intensive industries

Average Annual

Increase in Output Increase in Productivity

Measurement-intensive

industries

All Manufacturing

1960-66

11 .6%

8.4%

1964-70

5.3%

4.9%

1960- 66

5.5%

4.2%

1964-70

2.7%

2.4%

Source: Charles T. Stewart, "Measurement Activity and Changes in Industrial

Productivity" [47]

is indicated in table 3. The two time periods were selected to bracket the years 1963 and

1967, for which observations on measurement

intensity were available. The results are in

accordance with expectations.

A more rigorous test of the relationship

between measurement intensity and the rate of

growth of output and productivity was attempted by a contribution to this report from the

George Washington University [471 usinq data

for the 24 individual industries. The best

results were obtained for the correlation between measurement intensity (including labor

costs) in 1963 and the rate of growth^of output for the period 1960-66, with an R of

.338, significant at the one percent level.

The correlation with productivity change over

the same period yielded an of .263, also

significant at the one percent level. Correlations were also run for other time periods,

but the results were only marginally significant, with much lower R^. Correlations were performed to test the relationships between

measurement intensity (excluding labor) for

1963 and 1967, and the rate of growth of output and productivity. The signs of the coefficients were all positive as expected for

1963 and 1967 measurement intensity (but not

for changes in measurement intensity between

these two years). Only one relation, however,

bordered on statistical significance; measurement intensity in 1963 and productivity growth

between 1960 and 1966 (R^ = .126, significant

at the ten percent level). Thus this evidence

is not definitive, but should be regarded as suggestive of the contribution of measurement

activities to growth in output and productivity and indicative of the need for further work

on identifying and measuring the relations.

2.2.2.2 Measurement Intensity and Changes

in Industrial Structure

The relation between measurement intensity

and changes in output and productivity can also be examined using the technical coefficients of the input-output table. These direct

coefficients express in percentage terms the

amounts each industry requires from its

suppliers. Assume for example that a particular industry X5 decides to increase its production by $100,000 and that its technical

coefficients with respect to five industries

are X^=.^^, X2=.20, X3=.03, X4=.06 and X5=.03.

These technical coefficients mean that for

industry Xc to increase its production by

$100,000 it must directly purchase from industries X-j, X2, X3, X4 and of its own product

respectively eleven, twenty, three, six and

three thousand dollars worth of output.

Thus changes in the final demand for goods

and services are translated into change in

the demand for individual intermediate or primary industries by the technical coefficients.

Technical coefficients in the input-output

table may change over time due to changes in

the composition of demand (product mix),

changes in the relative prices on inputs, and

changes in the technological alternatives

available. Of these three, technological

change seems to have been the most important

source of variation in the technical coefficients in the American economy.

The analysis of input-output coefficients

over time is particularly important in understanding changes in the national measurement

system, since measurement is often embodied

in intermediate inputs as opposed to goods

and services produced for final demand.

Working with the trends in input-output

coefficients provides some insight into the

relationship between changes in output and

productivity and the demand for measurement

inputs.

12
Several economists have ranked industries

in terms of the rapidity of structural change

as revealed by changes in input-output coefficients. Anne Carter, in a study conducted in

the 1960's and Clopper Almon et dl more

recently, classified industries in terms of

whether their input-output coefficients were

rising, stable, or declining [21,22]. If we compare these rankings with the ranking of

industries in terms of measurement intensity

we can say that generally measurement intensive industries exhibit rising input-output

coefficients. In other words, the demand for

measurement intensive industries as intermediate inputs tended to increase more rapidly

than that for other industries. There are only two major industries that are ranked as measurement intensive which fall in the category with declining input-output coefficients,

i.e., construction and iron and steel. These

two industries are measurement intensive in

terms of dollar amount of value added, but

not in terms of per cent of value added in

measurement related activities.

While measurement intensive industries

appear to be experiencing rising input-output

coefficients, it is rather surprising to find

measurement instrument industries experiencing

declining coefficients. Clopper Almon shows

both electrical measuring instruments and

mechanical measuring devices with declining

coefficients in the 1960's. The implication

is that the demand for measurement instruments

as intermediate inputs has not been rising as rapidly as that for other industries. Thus,

we should not infer that the demand for mea- surement as an intermediate input has neces- sarily followed the pattern of demand for

measurement intensive industries.

13
3. ECONOMIC ANALYSIS OF COSTS AND

BENEFITS OF MEASUREMENT IN THE PRIVATE SECTOR

3.1 Economic Rationale for Measurement

Activity in the Private Sector

3.1.1 Introduction

In this part of the study we move from a description of the economic characteristics

of the measurement system to an economic

analysis of measurement activity in the private sector. The transition is from a macro

economic perspective to a micro economic perspective, a transition supported by the fact

that an analysis of the total measurement system, especially in a quantitative benefitcost mode, is bound to failure: Since a modern

society could not function without a systematic way of acquiring measurement data, the

value of having a measurement system is incalculable. Moreover, by focusing on specific

limited measurement activities, we can assess

the benefits of marginal changes in the mea- surement system.

While it is impossible to put a dollar

value on the benefits of the national measurement system as a whole, it is possible to

examine costs and benefits of marginal changes

in the measurement system. Specific measurements provide information which assists people

in making decisions required to reach a goal or objective. In the private sector, measurement information is used by producers, by

consumers, and at the interface between producers and consumers. It is necessary to

understand the role of measurement in assisting people to reach their goals in each of

these situations.

3.1.2 Measurement in Production

Marginal analysis is an essential tool for

examining costs and benefits of measurement

in the production process. The term "marginal" refers to the last increment of some variable; for example, an increment of measurement

may be defined as a single reading on an instrument, a single datum, or any observable

measurement. Marginal cost is the cost attributable to that increment of measurement. The

value of a unit of measurement under perfect

competition equals its contribution to sales

revenue, technically known as "value marginal

product.

The basic condition for maximizing profit

in the production process is to select the

optimal combination of resource inputs, including measurement, for a given firm, in the sense that no other combination will generate

greater profits. The condition simply states

that inputs of measurement or any resource should continue up to the point where the last

dollar spent generates exactly one dollar in

sales revenue. This also requires an economically balanced combination of resource

inputs for a given size of investment or

firm; namely that the last dollar spent on measurement will generate the same sales revenue as the last dollar spent on each of

the other resource inputs within a given

budget for the firm.

An important limiting assumption subsumed

by this condition is that of the independence

of the various resource inputs in the analysis. If we relax this assumption, then mea- surement inputs can influence the use of

other inputs and vice versa. Measurement

inputs can be substituted for non-measurement

inputs to produce a given level of output of

the firm. Assuming output is constant and

substitution of measurement for other resource

inputs is technologically feasible, the firm

will be willing to pay no more for measurement inputs than an amount equal to that

saved by not using the cheapest alternative

inputs.

A second assumption in the previous analysis is that the quantity of output may vary

but not its quality. If we relax this assumption, then the quality of a given output of

the firm may vary with different measurement

inputs. For example, the use of additional

measurements may permit the firm to claim

higher reliability for the product or services

that it sells. The value of measurements then

is indicated by their contribution to additional sales revenue arising from changes in

the quality of output.

3.1.3 Measurement in Consumption

Measurement affects consumers directly as consumption goods; for example, some people

use pay scales or buy bathroom scales to obtain information about their weight. Measurement also affects consumers indirectly.

One effect occurs when measurements are used

in computing sales transactions; for example

when scales and meters are used to measure

the quantities purchased. Another effect

occurs when measurements are used by consumers

to judge the physical attributes of other

goods; for example, some people using measuring devices to judge the performance of autos,

hi-fi and other electronic equipment, etc. In this section we consider the effects of improved

measurements on a consumer's utility when

the measurement is a consumption good. In the following section, we examine the effects

on the consumer's utility of improved mea- surement used in sales transactions.

Marginal analysis of measurement as a con- sumption good follows very closely the analysis in the preceding section on measurement

used in production. The term "marginal

utility" refers to the contribution of the

last increment of a consumer good or service

to the utility or satisfaction of the customer. The equilibrium condition is that for

14
a given level of expenditures the last dollar

spent for measurement goods should yield the same increment to utility as the last dollar

spent for every other good or service that

the consumer buys.

3.1.4 Measurement in Sales Transactions

Sales exchanges typically involve a cus- -tomer agreeing to exchange some of his re- sources (money) for a seller's commodity.

The amount of money the customer gives to the

, seller depends upon the unit price of the

commodity and the number of units of the com- modity the buyer and seller agree are transferred. Measuring instruments are often used

to determine the number of units of the com- modity transferred, as when a meter is used

to determine the quantity of a fluid or a scale is used to determine the number of

pounds sold. Improvements in measurements

used in determining sales transactions can therefore be expected to affect both the

buyers and the sellers. There are both efficiency effects and equity effects of these

improvements

.

Improved measurement in sales transactions

have an efficiency effect because they reduce

the transactions costs of buyers and sellers

in the sale of the commodity. These transactions costs involve haggling between buyers

and sellers resulting from error or uncer- tainty regarding the quantity or other mea- sured characteristics of the commodity

transferred. To the extent that improved

measurements reduce this error or uncertainty

in the quantity or quality of the commodity

transferred, they reduce the range within

which haggling between buyer and seller must

estimate the quantity transferred. As a result, buyers and sellers can reduce the

amount of time and other resources involved

in consummating the transaction. This reduction in resource cost increases the net value

of the goods transferred, which may accrue to either the seller or the buyer or both.

Improved measurements in sales transactions

also have an equity affect because they change

the bias of measurement in the transaction.

An overreading or an underreading meter trans-

, fers a quantity of the commodity other than

that which the consumer expects to receive

per meter unit purchased. In the case of

improvements in an overreading meter, real

' resources are transferred from seller to buyer

with a consequent increase in the buyer's

welfare and a decrease in seller's welfare;

in the case of improving an underreading sales

meter, the opposite results would obtain.

If we view sales transactions more broadly

to include the search costs of a potential

buyer for products with given performance

characteristics, then improvements in measurement will also have efficiency effects by

reducing the search costs of the buyer. A good example of this impact of improved mea- surement on search costs is in the use of

standard reference materials. To the extent

that a product embodies characteristics of

a standard, this information reduces the time

and resources a potential buyer must spend in

determining whether a product meets his expectations. More generally, when products have

measurement characteristics which refer to a standard specification known to the potential

buyer, this will reduce his search costs.

These examples can be generalized to any product which embodies measurement characteristics

which have known value to the potential buyer.

Without this measurement information, the

potential buyer is either forced to spend time

and resources (including measurement time and resources such as setting up his own testing

laboratory, attempting to determine whether

the product meets his specifications), or he

avoids purchasing altogether, or he purchases

a less assured product. Improved measurement

by reducing these search costs will benefit

the potential buyer as well as improve efficiency in the utility of the products purchased.

3.2 Case Studies of Costs and Benefits of

Measurement in the Private Sector

3.2.1 Introduction

The micro studies of the national measurement system provide some insight into the

costs and benefits of measurement in the private sector. They illustrate costs and benefits of measurement in production, consumption,

and sales transactions. However, several

qualifications must be introduced before discussing this evidence. First, the quantitative data for these costs and benefits is

often hypothetical rather than actual data

and, therefore, should be viewed as illustrating the qualitative discussion. Secondly,

the case studies do not attempt to relate

costs and benefits of measurement. While

potential benefits of improved measurement

are described, the costs of resources re- quired to achieve those improvements are generally unknown. The costs and benefits

of improved measurement are identified in

terms of individual producers and consumers

rather than the broader concept of social

costs and benefits taking into account sec15
ondary impacts of these changes in measurement. Therefore, the inferences made

regarding actual or recommended improvements

in measurement remain untested in terms of

rigorous cost benefit analysis. The case

studies are taken from the micro study for

that particular measurement activity as re- ported in this series of documents and the

words used may be those of the authors in

interim drafts of the reports, without

editorial revision.

3.2.2 Case Studies of Measurement

in Production

Surface finish [23]. Surface finish provides an example of the trade off between

measurement and other resource inputs in the

production process. The surface finish of a part can be overspecified, either from habit

or from lack of knowledge. One source estimates that improving the surface finish of

a turned surface from 50 to 25 micro inches

almost doubles the turning cost. The range

of surface finishes produced goes from 4 micro inch rms for roller bearings and tool

components to 250 micro inch rms for non- critical component surfaces. Improved characterizing parameters are available that

increase accuracy and permit the measurement

of specific surface characterizing parameters

most closely related to the function of the

product. By using these characterizing parameters to measure surface finish, the firm

can reduce the amount of materials or machining required in the production process. As an example of the use of surface measurements,

tin can surfaces are smoothed to 10 micro

inches to economize on the use of tin; the

trade off here is between increased measurement and metal -working inputs and other material resources; namely, tin.

Humidity and moisture [24]. Oil seeds and

crop grains, such as wheat, corn, soybeans,

oats, and barley, must be dried to a moisture

content of 13 to 15 percent or lower. This

is generally done with artificial heat, usu- ally propane, and uses energy. Too much

drying is wasteful because of unnecessary

use of fuel. Also, income and profits depend

on moisture content. Excess moisture results

in spoilage and poorer quality grains. The

price of grain is reduced if the moisture

content exceeds a designated value. The

farmer suffers a loss if the moisture content

drops below the designated value because

there is more grain per bushel (by weight),

without a compensating increase in price. If

the measurement of the moisture content is

not accurate, the farmer suffers some loss.

For example, total corn production was 5.6

billion bushels in 1971. With an average

price of $1.08 per bushel paid to the farmer,

the total value of corn was $6.0 billion in

1971. For corn with a moisture content over

15.5 percent, the price paid to the farmer

was 2 cents less per bushel for each percent

of moisture. Similarly, for each percent of

moisture under 15.5 percent, the price was

1.2 cents per bushel less. Data collected

in 1968 for moisture meters in Iowa showed

that moisture content varied by as much as 3.4 percent on the same samples. If this

pattern prevailed nationally, farmers could

have suffered a loss of as much as $341

million from excess moisture, or indicated

excess moisture. Similarly, the loss could

have been as much as $228 million from excess drying or from low moisture indication.

Based on these figures, reducing the inconsistency of moisture meters from 3.4 percent

to 0.5 percent would reduce the possible

estimated loss to $56 million for excess moisture and to $34 million for excess drying

Similar calculations can be made for other

grains.

Optics [25]. In medical radiology, subjective measurements of photographic density

are made by physicians and dentists. A re- cent study has estimated the effect of the

semi -automation of the examination of chest

x-rays. Semi -automation has increased the

rate of x-rays per unit of time by about 50

percent. As a result, the time saved by

radiologists was estimated to be between 2.5

and 5 million hours. At an estimated cost

of $30 to $40 per hour, the value of time

saved amounts to between $75 and $200 million

The data suggest a significant benefit in the

value of time saved relative to the cost of

semi -automation . This example illustrates

the trade off between improved measurement

and other inputs, e.g., the radiologist's

time.

Thermodynamic properties of fluids [26].

Change in capital costs is another trade off

between measurement and other inputs in the

production process. If measurement data are poor and subject to great uncertainty, there

can be overdesign of plants and unnecessarily

high capital investment. The thermodynamic

micro study provides several illustrations

of this trade off.

Measurement parameters are used in corre- lations that describe and predict thermodynamic states of gasoline components. It has

been estimated that at the limits of accuracy

for such predictions, specific heats can be

obtained from the generalized representations

that are in error by 25 per cent. Such error

in specific heat can result in construction

cost increases of $600,000. Another example

is the effect of vapor pressure errors on the

cost and operating characteristics of a pro- cess designed to remove 97 per cent of the

isopentane. Isopentane is used to increase

the octane rating of gasoline and thereby to

reduce the amount of lead additive required

16
in gasoline. These vapor pressure errors

result in excess cost of about S65,000 out of

$550,000 investment for major equipment,

excess cost of about 5100,000 out of $400,000

investment in energy generating equipment,

and an additional $100,000 per year in operating expenses of $450,000. The data are in

1968 dollars.

These examples from the thermodynamic

micro study reveal the need for improved

measurement of hydrocarbon thermodynamics

covering a comparative range from ambient

down to -265°F for pressures from atmospheric

up to 100 atm, with particular emphasis on the liquid-vapor equilibrium of complex mixtures. The study suggests that access to

this improved measurement data could decrease

capital and operating costs for plants built

with a wide range of uncertainty in measurement data.

Ionizing radiation [27], An important

area for improving measurement of ionizing

radiation is in the design and operation of

nuclear power plants. Only recently, uncer- tainties in measuring nuclear fuel reaction

rates were reduced from 20 percent to under

10 percent. What this means is that the

peak operating rate compatible with avoidance

of damage was formerly 20 percent below, and

is still nearly 10 percent below, the power

attainable if reaction rates v/ere accurately

measured

.

Spectrophotometry . [31] Ability to detect

differences in color and appearance is of

economic value in the many industries where

these qualities are important for the sale of

their products. They are also important in

medical diagnosis clinical tests. In the

paint industry, since the range of uncertainty

in reflectance is the same as the margin of error allowed in GSA specifications, considerable costs are incurred to meet specifications, and even then there are inevitable

failures. Improved accuracy would permit

automatic mixing and shading, would reduce

costs of inventory control, would avoid much

repainting for failure to match shades.

Similar considerations apply in the textile

and apparel industries. Improved measurement

capability would reduce the high labor costs

'of visual inspection of textiles. Inability

to communicate color and appearance accurately

results in frequent rejection and associated

extra costs of handling and shipping. Automated color and appearance techniques would

save much inspection, marking and associated

handling, and allow automation of much subassembly work.

3.2.3 Case Studies of Measurement in

Consumption

Acoustics [28]. The error and uncertainty

in acoustics measurement relates to a wide

range of accuracy in acoustical equipment

used by the consumer. For example, in the

production of sound level meters, the error

in measuring noise exposure of plus or minus

5 to 10 percent might be considered good

performance. The inaccuracy to be found in

the technology of ultrasonic non-destructive

testing is believed to be even more appreciable. A reduction in the error in acoustical

measurement could improve the welfare of consumers.

One effect can be identified in the mea- surement processes that relate to the acoustical properties of architectural materials

and systems. This is true because it is

through the accurate characterization of the

acoustical properties of architectural materials that noise control engineering in buildings is facilitated. Without accurate characterization of acoustical properties, the

provision of an acoustically comfortable

living environment for a consumer becomes

less certain and more expensive. Measurements

permit the development of improved noise control products. Furthermore, through publication of accurate test data, it might be

possible for products with demonstrable

superiority to be viable on the market and

for products that are inferior to fall into

disuse. Provision of accurate measurement

services, along with the publication of the

data, could facilitate scientific and economic

progress

.

Improved acoustical measurements are central

to the quantitative assessment of, and protection against, noise-induced hearing loss. It

has been estimated that in the United States

at least 1.2 million people have severe hearing

handicap. Costs of hearing disorders, although

hard to verify, have been estimated to amount

to $100 million annually. This estimated cost

includes the direct expenditure for educating

the acoustically handicapped, training of

specialists, and such therepeutic costs as hearing aids. Of course, reduced earning

power is another cost.

Ionizing radiation [27]. Accuracy in

measurement of ionizing radiation is important for the health and safety of consumers. Radiation treatment of cancer must walk a fine line between failure to destroy the cancer and damage to healthy tissues. But

only 65 percent of institutions visited in

1971, among the best hospitals doing radiation therapy, proved to have tumor dosage

within an acceptable five percent error. X-rays and other ionizing radiation widely

used for diagnostic purposes also increase

the probability of cancer. But 34 percent

of dental x-ray machines inspected in New

York in 1972 were in violation of safety

standards

.

Although uncertainties in basic standards

are not a major source of error in tumor

dose for x-rays and gamma rays below 1.25

MeV, they are important for high-energy x-rays

17
and fast neutrons. Nuclear medicine requires

both primary and dosimetry standards and

reliable dose-calibrator instruments. There

is also a need for improved monitoring of

radiation exposure of personnel.

Pressure [29]. Uncertainty in measurement

by airplane altimeters may exceed 500 feet

even at low elevations. The result is some

risk of collision with other aircraft on approaches to airports as well as crashes when

flying low. Exactly what this added probability is, and the associated loss of life

and health and their value, is not known.

An alternative and more quantifiable estimate of the cost of uncertainty is the changes

in air traffic regulations required to avert

the possible harmful consequences of this

uncertainty; greater vertical separation of

aircraft, greater vertical clearance of terrain, slowing down landings, reducing the

capacity of airports.

Altimeters are also used to maximize the

operating efficiency of aircraft, by adjusting engine power or thrust, selecting optimal

cruising speeds, and choosing minimum time

routes. Greater accuracy would save on fuel

and time.

Pressure measurements by tire gauges in

service stations are notoriously inaccurate.

Tire pressure that is too low reduces tire

life. With more than 100 million cars in the

nation, a measurement improvement increasing

I tire life by a single day is worth some three

r million dollars a year. Proper pressure also

( improves car maneuverability, contributing

• to safety.

i Temperature [30]. Improved accuracy in

1 the measurement of temperature can be of con- siderable value to health. Many diagnostic

1 tests are temperature-dependent, in particular

r enzyme rate analyses which require rapid mea-

) surement of very small samples. Variations

between labs, and even within labs, are often

( so great as to make comparisons useless.

( Acidity and blood gas analysis require small

c accurate sensors. But thermistors, widely

i used in medicine, are inadequately characterc ized. Accurate temperature measurement of

c tissues is important to avoid damage in the

L use of diathermy and ultrasonic therapy,

c Spectrophotometry [31]. Spectrophotometry

i is used in 90 percent of clinical tests. In

p some, such as hormonal analyses and tests for

c the presence of drugs, a high rate of error

f could be reduced by improved accuracy. The

d lack of comparability of test results hampers

t the progress of medical research.

Vi Fluid flow [32]. Fairfax County, Virginia,

t a suburb of Washington, D.C., is one of numern ous jurisdictions where construction has been

F limited by the capacity of its water pollution

b control and treatment plant. The five percent

p uncertainty in measuring water pollution, if

t eliminated, would permit the construction of

an additional 2,200 housing units, worth

around 100 million dollars. Such additional

housing would generate more than two million

dollars a year in additional property tax

revenue, as well as other tax revenues. But

it would also impose additional costs on local

governments. The net benefit to Fairfax

County of eliminating measurement uncertainty

would be the additional capital and operating

cost of a facility that is five percent too

large, plus the difference between additional

revenues brought in by 2,200 households less

the additional costs they impose on the county.

One area of flow measurement where improved

capability is needed and would have a large

payoff is the rapid measurement of variable

wind velocities. A particular application is

the problem of wind shear at low altitudes,

which some believe accounts for as much as fifteen percent of plane crashes occuring

during landing. Although no estimates are available on the probable saving in lives and

other benefits, the value of even a few lives

saved would justify substantial measurement

improvement costs. Studies have shown a very

high benefit-cost ratio for an improved wake

vortex avoidance system that would allow

reduction of the distance required between

planes coming in for a landing.. Reduced

separation in turn would save airline and

passenger time and economize on fuel and

airport capacity.

Radiometry and photometry [33]. The

accuracy realized in radiometric and photometric measurements at NBS varies from 1 to

5 percent, whereas in the field the best

performance is likely to be 5 to 10 percent.

There is some consensus that 1 percent accuracy is desirable in a number of uses: better

weather forecasting, remote sensing, detecting

improvements in the efficiency of lamps.

Lighting consumes 25 percent of the electric energy in the U.S.. Sales of the lamp

industry total $1 billion a year. Thus efficiency in lighting, and improvements in lamp

efficiency, have large potential benefits.

Gains in efficiency, with savings in electric

power, come in small increments, so that accuracy is needed to accelerate improvement. The

industry is hampered by lack of agreement in

measurement of lumens, reducing efficiency in use of lamps. Differences of 2 to 22 percent

have been observed. For light-emitting diodes,

there is more than a 40 percent disagreement

among manufacturers in specifications.. Accuracy is also important for performance in the

$5 billion a year photographic industry.

Accuracy in measurement is a factor in

health. Safety in phototherapy requires a 10 percent maximum uncertainty, which is probably not available in any hospital, although

well within the state of the art. Improvements in measurement are needed to evaluate

the health impact of new types of lamp, with

their diverse spectral characteristics.

18
3.2.4 Case Studies of Measurement in

Sales Transactions

Fluid flow [32]. Orifice meters, among

the most common used to measure pipeline flows,

have uncertainty in the published values of

their discharge coefficients of about 2 percent for water and other liquids and about

3 percent for gas. It is common practice for

gas transmission companies to transport as much as $1 million worth of products a day across one meter station. Therefore, an improvement of only 0.1 percent uncertainty

of measuring the flow rate involves a value

of gas transferred equal to $1000 per day.

Long distance transfers of water are becoming important. The California water project, a major interbasin transfer of water

supply between northern and southern parts of

the state, has an uncertainty in flow rate

measurement of about 5 percent. With charges

of approximately $62 per acre-foot for irrigation water in the Los Angeles area, the uncer- tainty or error of flow rate can correspond

to a significant sum. Efforts are currently

being undertaken to reduce the error in flow

rate measurement to 2 percent.

The improvements in measuring fluid flow

have efficiency effects, because reductions

in error or uncertainty can reduce the range

within which buyers and sellers must bargain.

Gas transmission companies might find it less

costly to negotiate the sale of gas across metering stations and water users in southern

California might negotiate water purchases

with less haggling. These resources saved

in the form of reduced transactions costs are

a measure of the benefits of improved measurement in the efficiency of fluid transfers.

These improvements in measuring fluid flow

can also have equity effects because they more accurately measure the fluid transfers and can result in changes in the welfare of buyers and

sel lers

.

Thermodynamic properties of fluids [26].

For more than a decade, the United States has

been importing liquid natural gas, transported

by LNG ships. Custody transfer contracts for

natural gas are based on heating value, mea- sured in BTU's. Actual transfer is based on the composition and the quantity of the material. The latter is measured by a flow meter

that measures pressure, temperature, and flow

rate to provide data which then is mathematically converted to a measure of the quantity

of material present. It has been estimated

that present uncertainties in the density of

liquid natural gas could result in a cost of

about $15,000 in the transfer of the custody

of the contents of a typical LNG ship. If the

United States eventually imports liquid natural gas from 500 ships annually, the estimated

annual cost of uncertainty would amount to

$8 million. That amount could be higher if

gas prices continue to rise. Improvements in

flow meter measurements could reduce the un- certainty regarding LNG transferred, which

would have efficiency effects in reducing

transactions costs between buyers and sellers.

Improvement in flow meter measurements would

also have equity effects to the extent that

improved measurement reduced bias in flow

meter measures. Most custody transfers of ethylene take

place near Houston, Texas. The critical point

of ethylene is about 9.5°C, which approximates

the ambient conditions in the Houston area in

the winter. Temperatures near critical are therefore a usual environment for the custody

transfer of ethylene. Properties of ethylene

are poorly known, even several degrees above

the critical temperature zone. Because of

this, custody transfer is uncertain and re- quires increasing the temperature of the

ethylene to one at which its properties are better known. Steam plants, which cost about

$30,000 in 1970, are used to raise the temperature of the ethylene. The plants typically have no other function and after the

ethylene has passed through the flow meter

and the custody transfer has taken place, the

temperature of the ethylene is lowered. In this example, improved measurement of ethylene

could again have an efficiency as well as equity effect. From the view of the firm

selling ethylene, improved measurement could

eliminate the costs of a steam plant used to

raise the temperature of the ethylene. From

the standpoint of both buyer and seller, a reduction in the uncertainty in measuring

ethylene transferred would reduce the transactions costs and to the extent of bias in

measurement result in a shift in the real

value of the ethylene transferred.

It is important to emphasize again that

though the microstudies convey some idea of

how improvements in measurement may benefit

producers and consumers in the private sector,

they do not necessarily provide the detailed

justification needed to increase the allocation of resources to improving measurement.

To use the example from humidity and moisture,

it is clear that an individual producer might

benefit from more accurate measurement of the

moisture content of his crop. It is not clear

that those benefits are sufficient to justify

an increased allocation of the farmer's resources to improve accuracy in measuring

moisture content by both farmer and elevator

operator. To do this he would need to determine his improvement in revenue from improved

moisture measurement capability as well as the costs of improved measurement in terms of

the instrumentation and labor costs required

to increase accuracy. Since both the costs

and benefits of the improved measurement

19
accrue over future time periods, he would

have to discount these benefits and costs

to determine the present value of the improvement in measurement. Even if the

improvement in measurement were justified

in terms of benefits and costs to the individual farmer, he would have to take into

account secondary effects upon other decision

makers. For example, the grain elevator

operator may respond not only by improving

the accuracy of his measurement of the

moisture content of grains but also by

adjusting price to recover any losses experienced in the transaction. Then the benefits

of improved accuracy in measurement of moisture content may accrue in part to the grain

elevator operator, in part to the individual

farmer, and in part to consumers of grain

which is to say to society via improved

management of resources. It should be clear

that a much more rigorous analysis of improved measurement of the moisture content

of grains is required before one could justify an increased allocation of resources to this measurement activity from the standpoint of private benefits and costs, let

alone from the standpoint of social benefits

that would accrue to third parties. On the

other hand, the basic social goal of equity

in trade may indicate a need for action by

state and local weights and measures

authorities, independently of considerations

of efficiency and exact cost-benefit analysis.

20
4. ECONOMIC ANALYSIS OF COSTS AND BENEFITS

OF MEASUREMENT IN THE PUBLIC SECTOR

4.1 Government and the National Measurement

System

4.1.1 Introduction

In this part of the study we move from an analysis of measurement activity in the private sector to analysis of measurement activity in the public sector, and specifically of

the National Bureau of Standards' role in

the system. The same caution introduced in

the previous section must be repeated here;

it is impossible to determine the economic

costs and benefits of the total government

role in the measurement system. It is possible to analyze the economic aspects of

incremental changes in government activity

in the measurement system. Thus, we will

break down activities of the National Bureau

of Standards into three major categories,

maintaining basic standards, research and

development, and services (i.e., calibration,

dissemination and publication). Within each

of these categories we have chosen examples

of costs and benefits of specific projects

from the micro studies. Note that these

categories are meaningful from the standpoint

of economic analysis; they may be less meaningful from another perspective such as that

of the physical sciences. Before examining

these case studies we briefly summarize the

economic rationale for government intervention in the measurement system.

4.1.2 Economic Rationale for Government

Measurement Activity

4.1.2.1 Measurement as a "Public Good"

In economics two major categories of goods

and services can be defined--pri vate goods

and collective or "public" goods. For private

goods, users are charged for what they consume

with the assumption made that under conditions

of pure competition, the amounts they pay measure the value to them of the item consumed. Since the consumption of the good in

question by one individual precludes its con- sumption by another, the value of the commodity to the user is the same as its value to

society. This assumption is not valid in the case of collective goods. Collective goods

are defined such that each individual's con- sumption of such a good leads to no subtraction from any other individual's consumption

of that good. Further, a decentralized

pricing system may not serve to determine

optimally the level of collective consumption.

Previous sections have developed the idea

that measurements provide information which

benefits producers, consumers, and the interaction of producers and consumers in sales

transactions. Information provided by mea- surements may be a collective good because

the information provided by a single measurement can be given to any number of people with

no one suffering a loss of the information.

Further, the cost of disseminating the information from measurement to another person may

be trivially small. Finally, some producers

of measurement information have substantial

investment in equipment and specialized people who make relatively few measurements.

For these producers the marginal cost of

taking another measurement, i.e., obtaining

another new piece of information, likely is

less than the average cost of measurements.

The above facts suggest that increasing

returns prevail in the production of measurement information and that the private market

system will not necessarily produce measurement services up to the point where marginal

cost is equal to marginal revenue. To this

extent, the private market system may not

allocate resources to the measurement system

efficiently and general welfare is not optimum. These characteristics of measurement

information begin to give a justification for

possible government intervention into the area

of providing measurement services to people.

However, before unconditionally accepting

government intervention in the provision of

measurement services, we can ask under what

circumstances will collective government

supply be more efficient than private or non- collective supply.

In principle, resources are not necessarily

misal located because measurements, a collective good, are supplied by private sellers.

Mi sal location of resources could be demonstrated only if we could show that an alternative institutional method of providing mea- surements could be found which cost less than

the present system and which provided adequate

devices for signalling when resources should

flow into or out of the production of measurements. Although measurement information used

in production and consumption exhibits many

public goods characteristics, there are no grounds, based simply on these characteristics,

to assume that the supply of these measurements by the competitive market place is non- optimal. Specific evidence is needed to establish any such conclusion. [34,35,36,37].

The following examples illustrate the

public goods characteristics of measurement

and suggest areas where reliance on the private sector would probably result in a misallocation of measurement resources:

21
4.1.2.2 Measurement and Consumer Protection

Because measurement plays a vital role in

the quantity, but probably more importantly,

in the quality of consumer goods, measurement

technology and measurement standards require

some collective or governmental supervision.

Measurements can affect the consumer in at

least four different ways. First, measurement

standards provide technical information directly to the consumer. The consumer can use this information to understand and to select

between relevant alternatives offered on the

market. Measurement information also provides

a means for the consumer to be aware of various kinds of nonprice competition, such as different amounts of particular ingredients

in different size containers. Finally, mea- surement information can help the consumer to

protect himself against possible fraud.

Secondly, measurement information can keep

the consumer's consultants informed. Consumers necessarily purchase items that contain

combinations of ingredients that are beyond

their technical expertise, such as medicines

and drugs. In his purchase of these commodities, the consumer usually relies on the advice of his physician or his pharmacist.

In the third place, measurement information

can protect the consumer from inferior or dangerous products. To be sure, measurement information is required to establish minimum

standards for the foods, drugs, and cosmetics

that consumers buy. Measurement information

is also the basis for the recall of products

that might endanger the health or even take

the life of the consumer. Recalls of products

have included such diverse items as canned

mushrooms, color television sets, microwave

ovens, and automobiles.

Fourthly, measurement information is necessary to enforce state and federal regulations

that establish minimum quality and safety

standards that protect the consumer and his

environment. Without measurement technology,

there would be no way to enforce some of the

laws and administrative rulings of such bodies

as the Department of Agriculture, the Environmental Protection Agency, the Food and Drug

Administration, and the Consumer Product

Safety Commission.

4.1.2.3 Measurement and Health and Safety

Measurement information and the development

of improved measurement technology requires

federal supervision and management to promote

the health and safety of the American worker.

At the federal level, the Occupational Safety

and Health Administration, Department of

Labor, has the main responsibility for providing the worker with a safe environment.

Other federal agencies, such as the Mining

Enforcement and Safety Administration

(Interior), the National Transportation

Safety Board (DOT), the Federal Maritime

Commission, and the Federal Metal and Nonmetallic Mine Safety Board of Review, also

play a role in protecting the worker. In addition, there are hundreds of state and

local authorities with mandates to protect

workers. These governmental bodies require

measurement information and measurement

development to appraise the effectiveness of

their standards, as well as to enforce their

standards.

A federal authority with measurement

responsibilities provides a valuable service

both to the governmental regulators and to

the business community that must comply with

minimum work safety standards. Measurement

information and new measurement technologies

can provide the firm with an information

input that can minimize the costs of compliance. This is especially true for small

businesses and for other firms with low

profit margins

.

4.1.2.4 Measurement and International Trade

Measurement and developments in measurement technology play a large role in international political and economic relations and

in the international exchange of scientific

findings. Although it was not a scientific

breakthrough, the July 1975 docking of the

Apollo and the Soyuz spacecrafts serves as

an example of the importance of measurement

technology to the objectives of U.S. foreign

policy. Without government provision of

sophisticated measurement technologies, the

Apollo-Soyuz mission could never have taken

place. The development of these measurement

technologies dates from the early work that

the Harry Diamond Laboratories conducted in

conjunction with the Department of the Army

Ordnance Corps. Although there have been some private attempts to rent or to buy the remaining Saturn V vehicles for missions to the

moon, it is not likely that private funds

would have supported a mission such as the

joint U.S. /Soviet docking.

Less spectacular, but perhaps none the

less important, are the day-to-day transactions in foreign trade where comparability

and measurement are of the essence. Scales

and instruments, specifications of weights

and dimensions, in short, all quantitative

international communications are cases in

point. That these matters must be coordinated by governments is a point of self

evidence.

22
4.1.2.5 Measurement Research and

Development [38,39,40]

Up to now we have been considering the use of measurement information by producers and consumers. Improved measurement requires

research and development expenditures to create the knowledge that underlies the

supply of better measurement information to producers and consumers. The rationale for

private research and development expenditures

to improve measurement is the extent to which

improved measurement is consistent with profit maximization of the firm (as generally

discussed under 3.1.2.) A profit seeking

firm will undertake research projects if the

expected gains exceed the expected research

costs, and if the total research and development cost is exceeded by the expected net

value of the invention. When the results of

applied research are predictable and relate

to a specific invention desired by a firm,

the opportunities for private profits through

applied research may result in the optimum

quantity of the society's resources directed

to that invention. Obviously, however, there

is a continuous spectrum of scientific activity between basic scientific research at one

end and applied scientific research at the

other. As one approaches the basic science

end, the degree of uncertainty about results

of specific projects increases and goal be- comes less closely tied to the solution of

a specific practical problem or the creation

of a practical object. This loose defining

of goals at the basic end of the research

spectrum is a rational approach to the great

uncertainties involved here and permits a greater expected payoff from the research

dollar than if the goals were more closely

defined. Thus, the direction of the basic

research project may change opportunistically

as the research proceeds and new possibilities

appear. Applied research is usually unlikely

to result in significant scientific breakthroughs except by accident, because if such

important breakthroughs are needed as a prerequisite to the resolution of a particular practical problem, the likely costs of

achieving these breakthroughs via direct

research effort are likely to be very high.

Thus significant advances in knowledge

usually require basic research but basic re- search efforts usually generate substantial

external economies. Here private profit

opportunities by themselves are unlikely to

draw a sufficient quantity of resources into

basic research, at least from the viewpoint

of social desirability. Significant advances

in scientific knowledge often have practical

value in many fields, yet few firms operate

in such a wide array of economic activities

that they are likely themselves to benefit

directly from all the new technological possibilities opened by the results of a successful

basic research effort. In order to capture

the value of the new knowledge in fields in

which the firm is not operating or willing

to enter, it must patent the practical applications and sell or lease the patent to firms in

the affected industries. These significant

advances in scientific knowledge are not often

directly applicable to the solutions of practical problems faced by the individual firm

and hence are not likely to lend themselves

to quick patenting. Thus, it is unlikely

that a firm will be able to capture through

patent rights the full economic value created

by basic research projects. If the research

results cannot be patented quickly and are

not kept secret by some other method, other

competitors or firms producing products which

use similar processes will be free to use the

results as an input to their own programs.

The fact that many industries have a need for

new knowledge but lack the incentive to individually produce that new knowledge suggests

two routes which have been used in different

places at different times. One is to have

government research undertake such tasks and

another is to establish cooperative industrial

research organizations as in the case of

Great Britain.

All of the foregoing is based upon the

argument of external economies which open a gap between marginal private and marginal

social benefits from basic research. With

respect to research and development to improve

knowledge relating to measurement, we begin

with substantial evidence of a viable market

for knowledge about improved measurements. It

is generally true that measurement users can, a -priori, determine the value to themselves of

improved measurements. It is also generally

true that this knowledge can be confined with

the aid of laws and regulations (such as patent laws) and therefore producers of new measurement knowledge can charge some price

for the new knowledge. The revenue flowing

from the sales of this new knowledge will

signal resources to flow in or out of the new knowledge making business. Where the

supplier of improved measurements is con- fronted with a conceptually knowable demand

schedule, suppliers of improved measurements

can estimate the returns from producing the

improvements. Further, by use of the patent

system or similar ownership system for knowledge, the developers of improved measurements

could appropriate for themselves more of the

value of the improved measurements.

But the existence of a market for improved

measurements and the ability to command a price for the knowledge of improved measurements does not indicate whether the private

sector allocates an optimum amount of resources

to the manufacture of this knowledge. Two

other elements are also important. One is the

23
long lag that normally occurs between the

start of a basic research project and the

creation of something of marketable value.

Firms with short run survival concerns will

not be so much concerned with profits many

years from now and will undervalue basic re- search projects compared to society, even perhaps in the absence of external economies.

A second fact is that the large variance in

the likelihood of profitability from basic

research projects will tend to cause a riskavoiding firm, without the resources to spread

the risk by running many basic research projects simultaneously, to value a basic research

project at a significantly lower level than

its expected profitability and again less

than its social value, even in the absence

of external economies.

The production of measurement knowledge is

risky and success depends on a large host of

interrelated uncertainties. The usual assumption is that risky ventures, such as attempts

to invent an improved measurement technique,

are discriminated against by inventors. It has also been argued that a patent system

cannot induce too much activity of this sort

leading to patented inventions because no patenter can charge for his patent more than

it is worth and most will get a good deal

less. If risk aversion is the general case,

the expectation is that there is under investment of resources in the production of

improved measurements. In this case, there

is a rationale for the government to act as

a risk bearer and consciously to spend some resources on the development of improved

measurements

.

4.1.3 Public Production of Measurement and

Improvements in Measurement

We have identified the public goods characteristics of measurement and improvements in

measurement. In this section we discuss the

economic rationale for decision making in

the public production of measurement and

improvements in measurement. As in the case

of private production of measurement, we

begin with the specification of the goals of

the government sector. The wide range of

goals of the government in producing measurement are suggested in the national measurement

system study, they include improvements in

science and technology, education, public

health and safety, environmental quality,

energy, national defense, etc. Note that some of these goals such as scientific leadership are intangible and are denied the

quantitative dimensions of a dollar common

denominator. Thus, the government's position

is more like that of a consumer seeking to

maximize satisfaction or utility, subject to

a fixed budget constraint.

One technique of economic analysis that has

proven useful in rational government decision

making is the technique of cost benefit analysis. Assume for the moment that the government is contemplating the production of a specific measurement good or service and that

the costs and benefits can be quantified in

dollar terms. The condition for an optimum

level of government production of measurement

product or service is that the marginal cost

is equal to the marginal benefit. The criterion insures that the amount spent by the

government in producing measurement goods and

services yields a benefit which is at least

equal to the value of products or services

foregone in the private sector. It also in- sures that government production of measurement

goods and services is not expanded at the

expense of other government programs which

yield greater benefits. The results of benefit cost analysis are usually expressed as a ratio B/K+0, where B equals present value of

a stream of annual benefits, K equals dollars

of immediate investment, and 0 equals present

value of all operation and maintenance costs.

The National Bureau of Standards has con- ducted benefit cost analysis for a small

number of projects. For many government mea- surement programs the benefits are non- quantifiable or can be quantified only at

great expense. Where benefits are difficult

to estimate, it is possible to apply an alternative technique called cost effectiveness.

Cost effectiveness analysis assumes that a decision has been made to achieve a given

objective which may be stated in quantitative

terms, even though the benefits cannot be

estimated in dollar terms. For example, the

National Bureau of Standards may set as an objective the achievement of a given level

of accuracy in the measurement of time. A variety of social goals may be enhanced by

this improved accuracy, including scientific

research, economic efficiency, national

defense, etc. The benefits of the enhancement of this broad range of goals may be

impossible to estimate in dollar terms; therefore the decision to achieve a given level of

accuracy in the measurement of time ultimately

rests on the evaluation of this program relative to other competing programs in the National Bureau of Standards. Assuming that a decision is reached to pursue this program,

then the improved accuracy in the measurement of time should be achieved with the

least amount of cost. Using cost effectiveness analysis various alternative methods of

improving the accuracy in measuring time can be compared and a choice made which achieves

the objective with the least cost. [41,42,43],
4.2 Costs and Benefits of National Bureau

of Standards Activities in the

Measurement System

4.2.1 Introduction

In this section we examine some costs and

benefits of National Bureau of Standards

activities in the measurement system. To

understand the role of the National Bureau

of Standards, it is necessary to provide

some institutional background. This institutional background defines the primary mission

or goals of the National Bureau of Standards

in the context of broader social goals introduced in the previous section.

The Constitution vested power in the

Federal government to regulate the monetary

system and the measurement system: "The

Congress shall have the power. . . to coin

money, regulate the value thereof, and of

foreign coin, and fix the standard of weights

and measures." The analogy between money and

a standard of weights and measures is tied to their functions as units of measurement.

Money can be considered as a common unit of

measurement analogous to units such as meters

used to measure linear distance, kilograms

to measure weight, liters to measure liquid

volume, and so on. To be a satisfactory measure of value, the monetary unit, like the

physical unit, must maintain a relatively

stable value. When money does not maintain

a relatively stable value, the public loses

confidence in money as a unit of measurement

and standard of value and therefore they re- fuse to accept it and use it. Similarly,

without an acceptable physical standard, the

public lacks confidence in the goods and

services that relate to that standard. They

will use scarce resources to compensate for

the lack of an acceptable physical standard.

These resources may be in the form of labor

and capital used in overmachining parts,

excessive quality control and testing of

products, etc., that would be unnecessary

with an acceptable physical standard. The

social saving that results from the adoption

of acceptable physical standards is the rate

of return on resources such as the above that

are no longer necessary to produce goods and

services that conform to the particular

standard.

The direct responsibility of the National

Bureau of Standards, set down as a statutory

obligation in 15 US Code 272, authorizes the

Secretary of Commerce to undertake: "the

custody, maintenance, and development of the

national standards of measurement, and the

provision of means and methods for making

measurements consistent with these standards,

including the comparison of standards used in

scientific investigations, engineering, manufacturing, commerce, and educational institutions with the standards adopted or recognized

by the government." The National Bureau of

Standards defines the standards for physical

measurement, acts as arbitrator and policeman

regarding disputes over them, and attempts

to improve the operation of the national

measurement system. In many cases the NBS

role is complementary to that of other government agencies assigned the task of enforcing measurement standards such as the state

agencies for weights and measures and the

Federal Environmental Protection Agency.

Measurement information provided by NBS is

the basis for regulatory and enforcement

functions of these agencies.

Thus, the above legislation should be

viewed as enabling legislation defining the

scope within which NBS can legally conduct

measurement activities. The actual level

of measurement activity can be evaluated in

terms of costs and benefits of the activity.

The following sections explore the costs and

benefits of National Bureau of Standards

activities in three broad areas: maintenance

of basic standards; research and development

to improve measurement; and dissemination,

calibration, and publication activities.

4.2.2 Maintaining Basic Standards

4.2.2.1 Background

NBS responsibility for maintaining primary

standards is based on the existence of a "natural monopoly" for this function. There

is need for a single primary standard. Although there may be and in fact there are competing calibration laboratories in many

areas of measurement, they have to establish

some method of mutual standardization. This

must be ultimately a single laboratory for

establishing and verifying primary standards.

If there were no NBS to perform this function,

its equivalent would have to be created.

Competition in establishing and maintaining

primary standards involves duplication and

waste; it is for this reason that we identify

this function as a "natural monopoly." If

it were not a public monopoly, it would have

to be carefully regulated to perform in the

public interest. But a natural monopoly

situation does not exist, either in the

conduct of research or in the dissemination

of accurate measurement.

4.2.2.2 A Case Study of the Basic

Standard for the Lumen

While a rigorous quantitative analysis of

the benefits of basic standards is usually

impossible, it is possible to examine some qualitative evidence on the benefits of

specific basic standards by examining situations where basic standards do not exist or

25
are inadequate. A good example of the problems associated with the lack of a basic

standard is the lamp industry, where there

is no agreed upon standard for the lumen for

many of the newer light sources [33]. A lumen is defined as a unit of measure for

the flow of light. Apparently there is ab- sence of confidence regarding this standard

between the lamp industry and the consuming

manufacturers who incorporate lamps into their

own products and who maintain different unit

sizes. The result of no agreed-upon standard

for the lumen among these firms gives some insight into the benefits of a basic standard. With the development of new high intensity discharge lamps, the absence of standards

leads to a separate discharge lamp lumen for

each manufacturer. Since Company A lumens

differ from Company B lumens, some firms

who would prefer to stock one lamp, must

maintain inventories for both lamps at added

expense. Because one supplier's standard

for the lumen may differ from anothers the

whole production of that supplier may be re- jected by a consuming firm. The difficulties resulting from this problem are now so pronounced that a number of these lamp buying firms are installing new acceptance testing laboratories at great expense. From the

standpoint of suppliers in the lamp industry

and organizations who use those lamps the ab- sence of an agreed upon standard for the lumen

results in lower efficiency and productivity,

and higher costs than would exist if there

existed an agreed upon standard. Theoretically, the benefits of the hypothetical standard lumen could be estimated by the reduced

costs to firms who could reduce inventories

of lamps conforming to different lumen standards, and in some cases, eliminate expensive

testing laboratories for lamp products.

This example of lumens also provides insight into external benefits of basic standards. The lack of an agreed upon standard

for the lumen affects consumers to the extent

that higher costs for lamps are passed along

to the consumer. The consumer may also incur

the costs of uncertainty associated with the

purchase and use of lamps with a wide range

of potential error in luminosity. The con- sumer may be the little old lady comparison

shopping in the supermarket, the commercial

and industrial purchaser, the original equipment manufacturer, or government purchaser.

The consumer, primarily large, but also small,

currently has technical problems of three

types as a result of the lack of an agreed

upon standard for the lumen. He has problems

of equipment compatibility; he has the efficiency problem of dealing with various manu- facturers employing discrepant units, and he

sometimes needs to compare a cormiercial ly

derived number with a natural or more precisely scientific one (e.g., comparison of

artificial illumination with natural light).

The existence of one agreed upon standard

for the lumen would reduce or eliminate these

technical problems and the general uncertainty of consumers in purchasing lamps. Again,

these external benefits to consumers are not

quantifiable at present, but there is abundant

qualitative evidence to support their

existence.

The example of the lumen also illustrates

the external benefits of basic standards for

international trade. The working group of the

Council for Optical Radiation Measurement,

in noting the lack of standards among manu- facturers and users of light emitting diodes

and displays, cites as an important concern

the "very large market domestically and

internationally." The photographic industry

expressed a similar concern. "Lamps are calibrated for our associated companies

throughout the world." International trade

depends on the world-wide acceptability of

such measurement. The working group on total

flux measurement of the Council for Optical

Radiation Measurement, which includes representatives of the lamp industry notes that

"many purchases are made on the basis of

promised performance. A difference of one or more percentage points in promised perfor- mance will, therefore, determine the business

to be done, either domestic or foreign by a given manufacturer or even by an industry.

This can run into millions of dollars."

"One company in the lamp industry, at least,

has run into the fact that their lumen levels,

for some, if not all lamp types, are different

by several per cent as compared to this country. Sales of our industry off-shore have

been slowed down because the European lamp

manufacturers are talking loudly about the

inflated lumen level of the United States

products. Under such conditions, especially

in a competitive business, it is very difficult to grow much of a market, at least in

Europe where a considerable effort has been

expended." "If we are to export lamps, our foreign customers must again know that Boston

lumens are the same as Paris, London, Tokyo,

or Istanbul lumens." This qualitative evidence suggests that a substantial boost to

foreign as well as domestic lamp sales would

result from acceptance of a basic standard

for the lumen.

The previous discussion points to the

benefits of a basic standard for the lumen;

it does not necessarily justify the National

Bureau of Standard's role in providing and

maintaining that standard. Presumably such

an agreed upon standard could also be selected

and maintained by an organization such as a standards laboratory or lamp manufacturer in

the private sector, or by another government

26
agency. Assuming that these alternative

sources could provide the same quality of

service in maintaining the basic standard

for the lumen, the question is whether these

alternative sources could maintain that standard for a lower cost. Again, in most cases

it is difficult or impossible to estimate

the cost of maintaining a basic standard in an alternative organization, particularly

where there is no experience to provide

evidence for such costs, and we are forced

to rely on qualitative evidence. The lamp

industry provides a good example of an indus-

• try where a basic standard has not existed

and where private firms and other government

agencies have not been successful in establishing an agreed upon standard. The fact

is that these firms are putting pressure on the National Bureau of Standards to provide

the standard. This remarkable industry

interest in greater activity by the NBS in

part stems from actual experience in lamp

companies which have had to derive their own luminous flux assignments independently. The

result on the market is deplored by all concerned. The thrust of industry concern here

is not "U.S. government, stay away," but

rather "NBS, please help."

The failure of private firms to establish

an agreed upon standard for the lumen is a classic example of the public goods nature

of basic standards. Each of the firms is

attempting to capture the maximum profits in

the lamp industry and each firm has its own definition of the lumen. If the definition

of the lumen used by one firm were accepted

as a basic standard, the sales and profits

of that firm would probably increase, while

that of other firms with a different definition of the lumen would decline. Under

these circumstances, it is not likely that

these firms will agree voluntarily to accept

and use a basic standard. Yet they recognize

the benefits of a basic standard for the

1 umen

.

With respect to the adoption of a basic

standard such as the lumen, it is easier to

achieve agreement regarding the basic standard through cooperation between private

» firms and the government (NBS). Further,

the maintenance costs for the basic standard

are probably lower in the public sector than

in the private sector. There are complementarities between the maintenance of one basic standard and other basic standards due

to the existence of technical expertise,

and overhead expenses in the public sector

can be spread over the whole range of basic

standards. These economies of scale would

be lacking if each basic standard were maintained by separate organizations in the private sector.

If it is determined, as suggested above,

that no other organization would be able to

establish and maintain a basic standard com- parable to that by NBS at lower cost, then

the relevant question for NBS is whether the

desired quality for the standard is maintained

at minimum cost (cost effectiveness analysis).

This aspect of the maintenance of basic standards is examined periodically by NBS and

substantial evidence suggests that their

basic standards programs conform to cost

effective criteria. The concept of internal

opportunity cost assessment is also apparent

in their review, i.e., if a program to maintain a basic standard were dropped, what would

be the best program to be picked up, and how

do the benefits and costs of the latter com- pare to the former.

4.2.2.3 Other Basic Standards

The example of the National Bureau of

Standards' role in maintaining basic standards for the lumen cannot necessarily be

generalized. The micro study reports provide

examples where some basic standards are maintained more efficiently in the private sector

or in other government agencies. The optics

micro study shows that basic standards with

reference to eyeglasses were developed and

are efficiently maintained by private firms in

that industry. The length micro study shows

that physical dimensional standards for oil

field equipment were developed quite successfully by a private industrial trade association. However, the oil companies, recognizing

the economies of scale in the custodial care and maintenance of those standards, then

turned them over to the National Bureau of

Standards. There are no basic standards for

surface properties, simply because the field

is relatively new and pressures have only

recently emerged for the adoption of basic

standards. There are no basic standards for

torque measurement and apparently no pressure

in the private sector for adoption of those

standards. The optics micro study reveals

that basic standards relating to aerial cameras were developed by the National Bureau of

Standards and subsequently turned over to the

U.S. Geological Survey because the expertise

in this area resides primarily in the latter

government agency.

The range of experience with basic standards illustrated in the micro studies suggests that there is no a priori way to judge

whether the National Bureau of Standards

should necessarily assume a role in developing

and maintaining basic standards in a particular field. If the private sector is efficiently performing this function or there is no pressure for adoption of basic standards.

27
then no role for NBS will be the optimum. It

is possible that basic standards developed in

the private sector can be more efficiently

maintained in the National Bureau of Standards

and vice versa. What does seem to be important is that the National Bureau of Standards

continually assess its role in terms of efficiency or cost effectiveness criteria. This

may require experiments to see if private or other public agencies are more efficient in

fulfilling this function. In some cases,

while the experiment may appear costly and

inefficient, this may be the only way that

NBS can determine whether the maintenance of

a particular basic standard is justified.

For example, the ionizing radiation micro

study provides an example where the National

Bureau of Standards turned a function of

primary standards maintenance over to private

firms with resulting chaos. Private firms were unwilling or unable to maintain an acceptable level of accuracy in the basic

standard comparable to that maintained by

NBS and the function was subsequently reas- sumed by NBS.

4.2.3 Measurement Research and Development

4.2.3.1 Costs and Benefits of Government

Sponsored Measurement Research

and Development

The rationale for NBS performance of basic

research is the presence of externalities.

The products of basic research often cannot

be appropriated by the organization conducting

research, or not to an extent sufficient to

provide an incentive for the conduct of re- search by private business. Patents are a technique for legal appropriation of some of

the benefits of successful research in order

to provide a profit incentive for private

research. However, much of the activity in- - volved in developing and improving measurement capabilities is not patentable. Even

what is may be subject to great uncertainties

and long delays in economic payoff, discouraging private investment.

Furthermore, basic research not only generates externalities, it has the character of a public good: use of its findings by some does

not reduce use of them by others. Although

costly to generate, they are nearly costless

to reproduce and disseminate. Under these

conditions, it may not be in the public interest for the research performer to capture the

externalities, whether by patents or by other

means, even if feasible.

As noted earlier, the benefits and costs of

research are among the most difficult to identify because of the public goods nature of

R&D. These problems are especially evident

in R & D funded by NBS to improve measurements.

Note tnat here we are not concerned with the

maintenance and dissemination of measurements

of given quality, but rather with improvements

in the quality and dissemination of those

measurements through research.

There are some instances in examining R&D

projects where it becomes legitimate to use as

a measure of project benefits the cost of the

best alternative way of achieving the project

goals. The use of alternative cost as benefit

measure really results in choosing a project

or design that minimizes the cost of achieving

a predetermined objective, e.g., developing

and disseminating measurement of given accuracy. This approach to project or program optimization where objectives are specified in

quantified non-value (e.g., physical) terms and

v/here the attempt is then made to minimize the

cost of achieving the specific physical objective, is called cost effectiveness analysis,

i.e., getting the biggest bang for the buck

where bang is specified in non- value terms.

It must be noted that when alternative cost is

used as a benefit measure, the lifetimes of

the two alternatives being compared should be

approximately the same. Otherwise we are trying to compare quite different benefit and

cost streams. All cost effectiveness analysis

should be extended to include a sensitivity ana- lysis with respect to the values of the specified objectives. That is, the analysis must

compute the rates of change of the minimum

achievable project cost with respect to that

goal. This computation indicates the economic

cost of increasing or decreasing the goals,

information that is particularly valuable when

the goals have been rather arbitrarily set.

4.2.3.2 Exploratory Studies of Benefits and

Costs of Selected R&D Projects

of NBS

Exploratory NBS studies of benefit-cost

measurement in research and development have

been conducted for:

(1) high accuracy large force calibration

servi ce

(2) high accuracy time and frequency

service

(3) standardization of a specialized

coaxial connector

(4) standard reference materials (SRM's)

in iron and steel

(5) standard reference materials metals

in oil

(6) semiconductor resistivity measurement

(7) liquified petroleum gas (LPG) meter

calibration

28
In 1968 the National Bureau of Standards

conducted an investigation of the costs and

benefits of the above seven R&D projects.

The following summary of that study is from

John T. Yates, Jr., Howard E. Morgan, and

Robert D. Huntoon, Exploratory NBS Studies

of Benefit Cost Measurement in Research and

Development . [3]

"Table 4 contains adjusted data for each of

the seven projects with benefits and costs

realized through 1967 at the center and

expected in the 1968-70 period at the

right. Relevant time periods for each

project are shown in Table 4 footnotes.

Data for four projects (large force calibration, time and frequency service, coaxial connectors, semiconductor resistivity) were reported for a multi-year period from project inception through 1967;

data for the LPG meter calibration project

and the SRM projects are based on the ex- perience of a single recent year. At the

center of Table 4 appear annual average

cost and benefit data to permit statistical

comparability of data covering different

time periods. Expected costs and benefits

for the 1968-70 period are three-year totals and were derived from a level extrapolation of historical data, except where

noted in footnotes of Table 4.

"The totals at the bottom of Table 4 indicate

that, to the extent the data are admissable

and comparable, the seven projects cost the

NBS about $0.8 million annually and yielded

benefits worth $285 million annually of

which $8 million were attributed to the

NBS work. Projected costs for the 1968-70

period for six projects total $1.5 million

and are expected to provide SI. 35 billion

in total benefits, of which $25 million are attributed to the NBS efforts (estimates

for the large force calibration facility were omitted due to uncertainty).

"These exploratory case studies of seven NBS

research projects have suggested methods

and problems in measuring the economic

value of publicly funded science. The

studies were intended to determine if it were possible to measure retrospectively

the economic pay-off of research in the

physical and engineering sciences. Em- phasis was given methods rather than

resulting data. The objective of the

investigation was achieved. Alternate

methods of measurement were developed

and evaluated and suggestions have

emerged to guide future studies.

"A major, and perhaps not unexpected finding,

is that research projects with different

technological objectives may not be com- parable on economic grounds because of

qualitative differences in their economic

impact. Consequently, project evaluation

by administrators of science programs re- quires consideration of technological objectives and feasibility along with the

economic value to principal users. Alternate projects having a clearly defined

common economic objective should be evaluated on economic as well as technological

considerati ons

.

"Essentially, this concludes that 'cost effectiveness' analysis (comparing the cost of

alternate ways of reaching a common objective) may be more useful in allocating

science resources than economic 'benefitcost' analysis (comparing the economic

value of alternate uses of common resources

unless projects are close technological

substitutes having similar restraints and

objectives. Common objectives may be macro economic (e.g., contribution to GNP or productivity growth) or micro-economic (e.g.,

savings or quality improvement for a user).

The impact of research on the latter is

easier to measure than the former because

the links between the economics of a firm

and the national economy are difficult to

quanti fy.

"Other conclusions emerging from these studies were that:

"The micro-economic effects of publicly funded

research can be measured. The measurement

requires tracing the technological paths

leading to adoption of an innovation by users. It has been demonstrated that this

can be done through a cooperative effort by

physical scientist, economist, and users of

research results.

"The measurement of net economic value (or

macro-economic change) is not possible

with the methods used in this study. An extensive case study of the indirect effects of the innovation as they are diffused in the economy may be required in

addition to the use of statistical or input-output models under limiting assumptions and measurable response.

"The direct economic effect of the seven NBS

projects was an apparent improvement in

productivity in industry and government

resulting from yield or process improvements. This supports the argument that

technology is an important factor in the

improvement of economic productivity.

29
Table 4. Summary of economic benefits and costs of selected NBS projects, 1967 [3]

(Millions of Dollars)

Project

Large Force Calibration

Time & Frequency Service

Coaxial Connectors

SRM (Iron & Steel)

SRM (Metals in Oil)

Realized (through 1967)

Total Annual Average

Costs

1 .350

3.000

0.225^

0.192P

0.406

n

Semiconductor Resistivity 0.235

LP6 Meter Calibration 0.072q

Benefits

NBS

Total Share Costs

0

18.20

0.03^

209.30

1/ . 0.60^

I.IOJ

0

8.80

0.005

2.34f

1/

0.54

0.88J

.405^

.019"

.192

.058

.034k

.008

Benefits

Total

0

6.05^

0.03

209. 30u

68.30"

0.601

1.1 OJ

NBS

Share

2.95^^

0.005

2.34

1.36 h 0.54^

0.88j

•787 285.38 8.075

Total Expected

1968-70'"/

Benefits

NBS

Costs Total Share

? 7 0.735 18.15 8.85

0 0.052^ 0.009

0.576 1,120.009 5.609

0.174 204.90 4.08

0.025 4.681^ 4.21

0.024 3.30 2.64

1.534 1 ,351.082 25.409

/Equipment cost of $1,258,000 depreciated over 50 years plus annual average operating cost

1^ of $46,000 based on 1965-66 operating cost of $92,000.

/Average annual cost of development of cesium beam standards 1958-67 ($1.6 mil. ^ 10) plus

capital cost of WWVL and WWVB depreciated over ten years, 1965-74, ($0.7 mil 10) plus

annual average operating cost for WWVL and WWVB FY 1964-67 ($0.7 4).

^/Sales of equipment $12.2 mil. estimated to extend from 1963 or 1964 through May 1967 or approximately 4 years ($12.2 ^ 4) plus labor for use and maintenance for 2 years

($6.0 mil. ^ 2).

^/HBS contribution to sales divided by 4 years ($5.8 mil. 4) plus NBS contribution to

-labor divided by 2 years ($3.0 ~ 2).

^'Actual sales of connectors in 1967 and estimated potential in 1968-70.

'''/Reduced cost of Mn, Ni and Cr plus reduced cost of steel production using basic oxygen

process, 1966 only.

g/

h/

Based on accelerated rate of steel production using basic oxygen process.

Reduced maintenance cost for railroad and trucking engines plus reduced losses of air-

. .craft due to engine failure

Realized increase in yield for 12 months in FY 1965-66.

. /Value of reduction in measurement error, 1966.

;Votal FY 1961-67 costs of $235,000 divided by 7 years.

1/

m/

n/

Totals not available; estimates are annual for selected years.

Expected costs and benefits are a total for the three years 1968-70 and are estimated at

annual rates shown in past unless other estimates were available.

/Based on period 1956-67.

Pyi966 only.

r/

1958-1966.

Based on historical growth rate of semiconductor materials market over past 8 years.

Table 5. Comparison of gross and net benefits and benefit-cost ratios for selected

NBS projects through 1970 (annual average NBS costs and benefit contributions only)^' [3]

Project

Time and Frequency Service

SRM (Iron and Steel

)

Large Force Calibration

SRM (Metals in Oil)

Semiconductor Resistivity

Coaxial Connectors

IPG Meter Calibration

NBS

Costs

NBS Contribution to Benefits Gross B Gross Net to Cost

(Mi 1 1 ions of dollars)

.288 2.950 +2.662 10/1

.192 1.980 +1.788 10/1

.071 0 -0.071 0

.058 1 .360 +1 .302 24/1

.026 1 .026 +1.000 40/1

.015 0.004 -0.011 0.3/1

.008 0.880 +0.872 110/1

a/ Annual averages based on period studied and extrapolated to 1970.

Table 4 for dates included.

See footnotes for

Source of tables 4 and 5: Yates, Morgan, and Huntoon, Exploratory NBS Studies of

Benefit-cost Measurement in Research and Development [3]
"Results of the seven studies were largely

noncomparable due to differences in:

a. Project technological objectives

b. The method and completeness of the

measurement of economic value

c. Point in project life at which benefits and costs were measured

d. Present values not properly discounted over time

e. Treatment of capital costs

f. Basis for estimates of relative NBS

contribution

g. Approach and judgment of different

investi gators

"Case studies of the economic effects of

science projects may have greater value

to the scientist than the administrator

of science programs in that the exercise

forces a careful examination of the rele- vance of science to the solution of practical problems." [3]

4.2.4 Measurement Services of the National

Bureau of Standards

4.2.4.1 Services in the National Measurement

System

Calibration, dissemination, and the provision of reference materials lack the character

of natural monopoly, public goods, or externalities. The basis for a NBS role lies in

the presence of economies of scale and specialization. For example, the capital required

to calibrate to primary standards is costly;

where the calibration process itself is time

consuming or expensive, the amount of primary

calibration services demanded by users may be

small relative to the capacity of primary calibration facilities and personnel. A single

supplier under these circumstances can lower

costs as it expands its activities, and keep

costs much lower than if two or more suppliers

were each to provide the capital and divide up

a limited market. Further down the calibration

chain, the costs of calibration are smaller,

, the number of calibrations demanded by users much larger, so that all available scale eco- nomies can usually be attained by more than a single supplier. NBS then loses its distinctive role. Commercial laboratories sell calibration services, and many firms provide their

own. Economies of scale may also occur in some

types of research that recommend a single re- search performer. This is most likely to be

the case when very expensive capital equipment

is involved.

4.2.4.2 Calibration and Dissemination Services

Calibration and dissemination services of

NBS generally involve rendering a service to firms, consumers, and other government agencies

which is clearly identifiable and for which in some cases there exists a market test. The measure of benefits and costs for these and

other services of NBS must extend beyond the

market values that comprise GNP; however, the

most explicit benefits from these services are the market values of the services produced.

If private firms are willing to pay for measurement services from NBS such as charges for calibrating instruments, the amount they are willing

to pay is at least a lower bound estimate of the

value of these services. Similarly, if other

government agencies are contracting with NBS

for measurement services such as calibration,

the revenue generated by the contract is a lower bound estimate of the value of those

servi ces

.

The same situation is true for costs. The

most explicit costs are those related to project inputs for which funds have to be paid

out. In the case of calibration and dissemination services, this should include all of

the labor, capital, material, and overhead

expenses associated with the service. The

problem is to select among several prices or wages to cost out these inputs, but market

prices are available.

Even where a user of NBS measurement services pays a price for those services, that

price may not be an accurate measure of the

cost of the project. For example, in June

1970 the Comptroller General reported to Congress that fees charged by the NBS for calibration of instruments had resulted in overcharges to the Department of Defense of

$806,000 during fiscal years 1966-1968 and

undercharges of $713,500 to private industry

[44]. The General Accounting Office recom- mended that the Bureau review its accounting

procedures to ensure that user charges for

services for private industry include depreciation of buildings and departmental over- head and to correct inequitable or inconsistent methods of allocating overhead costs in

general. Following receipt of a draft of the

GAO report, the Bureau revised its pricing

policy for calibration and test services in

July 1969 and again in April 1970, but it disagreed that there was a need for improving its

accounting system in the manner recommended.

The above example illustrates a variety of

problems in measuring the benefits and costs

of NBS services. One problem is that the

calibration services provided by NBS are so large relative to the total calibration ser31
vices in the economy that they probably affect

the prices of the latter, presumably lowering

the price of calibration services in the private sector relative to what those prices

would have been without NBS. Added to this

is the problem of market imperfections in calibration services. Many companies maintain

calibration service as in-house components of

their production process so that prices for

those services are arbitrarily set without a close relationship with costs. Therefore, it

is difficult to use prices for calibration

services in the private sector as a measure of

the value of calibration services by NBS since

that assumes competitive market prices that

relate closely to costs. If the GAO charge is

accurate, then the NBS was in effect providing

a subsidy to private firms and a tax or sur- charge to the DOD for calibration services.

This differential pricing makes it difficult

to use market prices to measure the benefits

and costs of these services, and also suggests

a misallocation of measurement resources, i.e.,

private firms consume measurement services in excess of that which is justified by the value

of measurement resources in alternative uses,

and the DOD consumes less than an optimum

volume of measurement services.

We should also mention several other problems that are also relevant in estimating the

costs and benefits of measurement services. One

problem is that the prices paid by NBS for fac-(

tor inputs may be overvalued or undervalued.

^ This problem is extremely difficult to evaluate; some economists have charged that government agencies tend to undervalue capital equip-'

ment and especially buildings, because these

capital inputs are provided to the government

at subsidized rates. It is charged that government employees' wages, including fringe

benefits, are in general higher than those in

the private sector for comparable qualifications and job skills. If the prices of these

factor inputs are undervalued or overvalued

in NBS, then they are not an accurate measure ; of the social costs of NBS services. It

'' should be added that in a less than full em- ! ployment economy, the wages of employees and

rates of return to capital may not reflect

the opportunity costs of those resources, i.e.,'

the private costs exceed the social costs. t However, this problem is less relevant to NBS, i which tends to employ highly skilled employees

and very specialized capital equipment.

A final problem is the indirect effect of

calibration and dissemination services on the

economy or external benefits and costs. We

should be cautious in evaluating these external benefits and costs. Any kind of expenditure, public or private, has secondary effects

on other industries, i.e., input suppliers and

output buyers. In a fully employed economy,

expansion of NBS services causes at least a temporary contraction in those areas from

which its labor and capital are drawn and

also makes profitable the expansion of industries supplying processed inputs or dependent

on the projects' output. Thus, whereas an NBS

project is likely to have positive secondary

effects on related industries, the private

projects that are foregone or reduced in size

because of the taxes collected to finance the

project will have negative secondary effects

on their related industries. There is no reason in a fully employed economy to expect the

positive secondary effects of the new public

project to be any greater than the negative

secondary effects of reduced private spending.

As an extreme example of the above, we can examine the time of day service provided by the

time and frequency group. One can point to the

expansion of a number of firms in the private

sector that rely on the time of day service of

time and frequency through the telephone com- panies, but this has been accompanied by a contraction of firms in the private sector

dependent on time of day service from USNO,

e.g.. Western Union [45].

The major problem in identifying the benefits of calibration and dissemination services

in NBS is that it is usually not clear what

level of services, if any, would be picked up

in the private sector if NBS discontinued its

services. However, there are a few examples

of changes in NBS calibration services that

provide some qualitative evidence of these

benefits. The time and frequency division

recently reduced the area of dissemination of

WWVB signals significantly. There was an immediate response from users of that service

to restore it at the former level. On the

other hand, the optics groups has found that some of its measurement services are not es- sential in the sense that alternative sources

of optical measurement service exist in the

private sector. The optical radiation group

has experienced a similar response. They

find that it is conceivable that, eventually,

virtually all of their calibration and testing

services will be obtained from the commercial

secondary standards laboratories; at present,

however, the frequent discrepancies in measurements encourage many users to get calibrations

from NBS. On the other hand, the ultraviolet

radiometry group has found that when NBS re- duces the calibration and dissemination ser- vices to the private sector, that private

firms and alternative suppliers do not adequately fill the gap in the sense that the

quality of measurement achieved declines. The

fluid flow group also finds that private firms

cannot maintain the same level of accuracy

without NBS calibration and dissemination servi ce. 32
4.2.4.3 Provision of Standard Reference

Materi als

The National Bureau of Standards has attempted to assess the costs and benefits of

its standard reference materials program.

The following summary is from James Bennett,

The Economic Impact of Standard Reference

Materials [46 J.

"NBS defines a Standard Reference Material as

a well characterized material, produced in

quantity, that calibrates a measurement system. Essentially, SRM's are samples of

materials with certified chemical and physical properties (e.g., chemical composition

density, viscosity) which can be sent to the user so that measurement equipment can be

calibrated on-site. The existence of SRM's

obviates the need for and saves the expense

of sending measurement devices to a laboratory outside the firm for periodic calibration. Basically, SRM's have two principal

functions which are associated with improved

efficiency in (1) industrial and research

processes and (2) the specification and testing of characteristics of products.

"In this report, emphasis is given to the eco- nomic benefits which result from the use of

SRM's specified in (1) above, i.e., the

benefits accruing from reductions in waste

and inefficiency when SRM's are employed

to achieve better process control through

improved measurement. This does not imply

that the other function is of minimal or secondary importance. A clear definition

of and basis for the measurement of perfor- mance characteristics is essential to buyers

and sellers in both national and international markets. Rather, the benefits from

cost reductions in process control applications are more easily identified and yield

more readily to quantification than benefits

such as those that are derived from the use of SRM's in research which have benefits

over a much longer time scale and are difficult to assess. To the extent that these

benefits are not treated in this report,

the magnitude of the estimated total benefits can be regarded as understated or con- servative.

"The purpose of this report was to assess the

economic benefits and costs of the Standard

Reference Materials program of the National

Bureau of Standards and to provide indications of the extent of economic leverage

of the program.

"The SRM program is extremely diverse, for

about 850 well-characterized materials

used for calibration in the measurement

process are available. Because economic

benefits arise from the use of SRM's rather

than from the program per se , two generic

groups of SRM's were selected for investigation: the 24 metal lo-organic compounds

that are employed in spectrographi c analysis of lubricating oil to detect for trace

metals which indicate impending engine

failure and 31 ferrous metal SRM's which

are used in process control in the steel

industry. The ferrous metal SRM's permit

the reduction in waste of expensive alloy-

'I ing elements, reduce the number of inaccurate measurements obtained by other

I (more time-consuming and expensive) means,

} and reduce the cost of recycling rejected

production steel

.

'Although these SRM's account for only 6.4

j per cent of the 850 types currently in

I stock, total annual benefits of at least

$75 million could be traced to the SOAP

program which uses the metals in oil SRM's

and $18.3 million to the sample of ferrous

metal SRM's. A benefit-cost ratio of at

least 1000:1 exists for the metal lo-organic

compounds. No benefit-cost ratio could be

explicitly computed for the ferrous metal

SRM's because some of these materials were originally introduced almost 70 years ago

and cost data are not available. All evidence indicates that although the research

and development costs are incurred once in

the development of SRM's, the benefits

resulting from their use can accumulate for

years. Important sectors of the U.S. eco- nomy benefit from the SRM's reviewed in

this report: the Department of Defense,

the transportation sector, and the metals

industry. These sectors of the economy

are basic to the functioning of the eco- nomy and contribute significantly to na- tional output and employment.

"One difficulty in calculating benefit-cost

ratios is due to the question of what are the relevant costs. In considering the

cost of an SRM, only the additional or marginal costs should be included - not the

investment in basic research. R&D costs are one of the principal cost elements of

SRM's, but these costs should perhaps be

categorized as an investment in research

because the Congressional mandate for NBS

requires that levels of scientific competence be maintained in a wide variety of

33
areas. Foreign counterparts of NBS do

classify R&D costs of SRM's as overhead.

The cost of production, obsolescence, and

operations are recovered by user fees collected from the sales of SRM's. The net

cost to the government of the program is

very small and during the period 1969-1974,

NBS appropriations have averaged only about

$2 million per year.

A second difficulty arises when one attempts

to allocate the total benefits among the

various factor inputs, one of which is an

SRM. SRM's are used in conjunction with

measuring devices and other factors. It was not possible to determine which 'share'

of the total benefit should be attributed

to the SRM and, obviously, the benefitcost ratio is overstated when all benefits

are allotted to the SRM. In order to cor- rect to at least some degree for this over- statement, total benefits were estimated

conservatively for only a brief period of

time. All evidence indicates that the

benefits will continue to accrue, perhaps

for years. In any event, it is justifiable

to assert that the benefits due to the SRM

exceed any reasonable estimate of the cost

by a very wide margin. In addition, all

the uses of the SRM's are not even known

and may not be known for years into the

future. For these reasons the benefitcost ratios computed here should be regarded more as indicative of order of magnitude rather than exact calculations.

The SRM program can also have a direct impact on national goals. For example, if

any of the cost savings experienced by industry is passed onto the consumer, domestic inflation is moderated. Lower cost and

lower prices assist American industry to

compete in world markets to improve the U.S.

balance of payments. Reduction of waste of

imported materials also aids the balance of

payments. More effective competition in

world markets also helps solve the unemployment problems in the U.S. by providing jobs

to U.S. workers. SRM's are also important

inputs to the research process which, eventually, results in better products and more efficient industrial processes.

NBS is uniquely qualified to produce SRM's

for a variety of reasons. First, it has

a reservoir of highly competent talent

which is capable of performing the research

required for these materials; the development of a specialized team may not be eco- nomically feasible elsewhere - particularly

in fragmented industries where firms are

small in size. Second, industry-wide standards are generally needed, often from a 'neutral' supplier which guarantees continuing availability. Third, traceability to

NBS of measurement systems are sometimes

required by military specifications. Finally, the benefits resulting from SRM's are directly related to the speed of adoption of the measurement system. NBS has

the capacity and the incentive to publicize the existence and uses of the SRM as widely as possible.

"In sum, based upon the findings of this re- port which investigated in depth only a small sample of SRM's, the benefits are extremely large relative to any reasonable

estimate of the relevant cost. As the

program expands into other areas of na- tional concern such as pollution, health,

and agriculture and serves the needs of

other industries, the total benefits will

probably also grow. Put another way, if

every dollar of government spending produced as high a rate of return over as long a time period as SRM's, the national

economy would likely be substantially

improved. "[46]

.

4.2.4.4 Publications

A final note should be added regarding the

costs and benefits of publication and educational services offered by the NBS. These

services are probably least amenable to any

market tests. The marginal cost of disseminating such information is usually infinite^^-

imal compared to the costs of creating that

information. This public goods characteristic of measurement information is strong

prima facie evidence for a significant role

for publication and educational services by

NBS. The qualitative assessment of these

programs in the micro studies tends to be

favorable; however, it would be possible to

supplement this qualitative evidence with

some quantitative tests. For example, when

the Bureau of Domestic Commerce asked the

3,000 subscribers to its monthly "Construction

Review" ($14.50 a year) to return a postcard

questionnaire about the usefulness of the

publication, only 250 did so. It would be

interesting to test the subscriber use of

NBS publications in a similar manner.

34
5. CONCLUSIONS

In this study we first attempted to put the

national measurement system in an economic

perspective. The concept of measurement was defined in economic tenris, the economic dimensions of the measurement system were estimated,

and the relationship between economic change

^and the measurement system was explored. The

*economic analysis of the measurement system

proceeded with an analysis of the costs and

benefits of measurement in the private sector

'and in the public sector. In each of these

sections, we attempted to point out specific

limitations in existing studies relating to

the economic analysis of the national measurement system. In this concluding section we

will discuss gaps in the existing literature

and areas for further research.

This study has emphasized that measurement

is part of the knowledge or information sector. Not surprisingly, this is an area where

economic analysis is in its infancy. As additional theoretical and empirical work becomes

available, relating to the production of knowledge, it is important to examine the relation

of measurement information to the information

sector.

The preliminary work on the cost of physical measurement could be updated and used to

forecast future changes in demands for measurement, e.g., using the forecast for input-output

tables. The instrumentation sector in particular could be examined more thoroughly. The

original study on the costs and benefits of

metrication could also be updated to examine

the current and prospective trends in conversion to the metric system. The relationship

between measurement and changes in output and

productivity has been explored in a preliminary way and the results suggest that this is an important area for further research, particularly at the industry level.

The analysis of the costs and benefits of

measurement in the private sector reveals a basic weakness. The perspective of the micro

studies is that of the physical scientist and

the specific measurement function he is con- cerned with, i.e., length, mass, time, etc. An alternative approach would be to focus on the user of measurement. To understand mea- surement in production one might choose a particular firm or industry and attempt to

understand measurement problems from that

perspective. For example, by focusing on the

machine tool industry, one would find measure- ment problems that cut across most of the

divisions used in the micro studies. In particular, the analysis of measurement from the

standpoint of consumers has been left almost

untouched in the micro studies. Again, mea- surement problems for the consumer probably

encompass most types of physical measurement.

The perspective of producers or consumers would make it easier to explore secondary impacts of costs and benefits of measurs;;ent for

society as a whole.

The micro studies provide important insights

into the costs and benefits of National Bureau

of Standards programs. However, the studies do

not necessarily provide a basis for expanded

National Bureau of Standards activities. None

of the studies provides evidence that would

satisfy the conditions of rigorous economic

analysis such as cost benefit or cost effectiveness analysis. Some of the studies suggest that

the data is available or could be generated to

apply more rigorous tests to provide evidence for

changes in National Bureau of Standards programs.

35
REFERENCES

[I] Huntoon, R. D. , Concept of a national

measurement system. Science 1 58 . 67-71

(6 Oct. 1967).

[2] Eskite, W. H. , Jr., Studies of the

national measurement system, final report

on Department of Commerce Science and

Technology Fellowship Program assignment,

NBS internal working document (July 1,

1966) . [3] Yates, J. T., Jr., Morgan, H. E., and

Huntoon, R. D., Exploratory NBS studies

of benefit-cost measurement in research

and development, NBS internal working

document, 33 pp. (1967).

[4] Morgan, H. E., The economic value of

making measurements, Proc. 1968 Standards

Laboratory Conference, NBS, Boulder, Colo.,

Aug. 26-29, 1968, Ed. H. L. Mason, Nat.

Bur. Stand. (U.S.), Spec. Publ . 313,

pp. 27-36 (May 1969).

[5] Corruccini, R. J., The role of basic

standards in the economy, NBS internal

working document, 41 pages (July 3, 1972).

[6] Seed, J. R. , and Pawlik, P. U., National

measurement system - NCSL, the value of

making measurements, NCSL Newsletter 14_, No. 1, 34-43 (March 1974).

[7] Pawlik, P. U., Economic dimensions of

the national measurement system, NBS internal working document, 350 pages (1973).

[8] Morgan, H. E., The economic cost of

physical measurements, NBS internal working document (June 30, 1974).

[9] Crane, G. M. , Economic effects of an improved measurement, Ph.D. dissertation,

George Washington University (1971).

[10] Machlup, F., The Production and Distribution of Knowledge in the United States,

pp. 44-45 (Princeton University Press,

Princeton, N.J. , 1962).

[II] Demsetz, H., The cost of transacting.

Quarterly Journal of Economics 82, No. 1,

35 (Feb. 1968).

[12] Rothwell, G. J., The performance concept: a basis for standards development,

ASTME Vectors, No, 2 (American Society of

Tool and Manufacturing Engineers, Dearborn, Mich. , 1969).

[13] Huntoon, R. D. , The measurement system

of the United States, Proc. 1966 Standards

Laboratory Conference, Nat, Bur. Stand,

(U.S.), Misc. Publ. 291, 89-98 (July 13,

1967) . [14] DeSimone, D, V. , A Metric America:

A Decision Whose Time Has Come, Nat. Bur.

Stand. (U.S.), Spec. Publ. 345, 188 pages

(July 1971). See also the series Nat. Bur. Stand. (U.S.) Spec. Publ. 345-1 through

345-12 (1971).

[15] Poulson, B. W., and Hagerbaumer, J.,

An economic analysis of the costs and

benefits of metrication, NBS internal

working document (April 1975).

[16] What six firms found going metric:

A lot easier and cheaper than expected,

U.S. News and World Report, p. 114

(July 5, 1976).

[17] Porat, M. U., Defining an information

sector in the U. S, economy, second year

project report (Institute for Communication Research, Stanford University,

Nov. 1974).

[18] Stanford Research Institute, A study

of trends in the demand for information

transfer, NASA Ames Research Center

(Menlo Park, Cal . )

.

[19] Kendrick, J., Postwar Productivity

Trends in the United States 1948-1969

(Columbia University Press for the

National Bureau of Economic Research,

New York, N.Y, , 1973)

[20] U.S. Department of Labor, Bureau of

Labor Statistics, Handbook of Labor

Statistics (1973).

[21] Carter, A., Structural Change in the

American Economy (Harvard Univ. Press,

Cambridge. Mass., 1970).

[22] Almon, C, Jr., et al, 1985 Interindustry Forecast of the American Economy

(D. C. Heath & Co., Lexington, Mass., 1974).

[23] Young, R. D. , The national measurement

system for surface finish, NBSIR 75-927,

49 pp. (July 1976).

[24] Wexler, A,, A study of the national

humidity and moisture measurement system,

NBSIR 75-933, 51 pages (Aug. 1975).

[25] Swyt, D. A., The national measurement

system for optics, NBSIR 75-942 (Aug. 1976).

[26] Klein, The national measurement system

for the thermodynamic properties of fluids,

NBSIR 75-934 (in preparation).

[27] Caswell, R, S., The national measurement

system for ionizing radiation, NBSIR 75-946

(in preparation)

.

[28] Pallett, D. S., The national measurement

system for acoustics, NBSIR 75-938, 94 pages

(March 1977).

[29J Heydemann, P. L. M. , The national meas- urement system for pressure, NBSIR 75-931

(Sept. 1976).

[30] Schooley, J. F., The national temperature measurement system, NBSIR 75-932

(Aug. 1976).

[31] Venable, W, H., Jr., National measurement system for spectrophotometry, NBSIR

75-940 (in preparation).

[32] Haight, W. H., Klebanoff, P. S., Ruegg,

F. W., and Kulin, G. , The national fluid

flow measurement system, NBSIR 75-930,

65 Daaes (Aug. 1976).

36
[33] Kostkowski , H. J., The national measurement system for radiometry and photometry, NBSIR 75-939 (in preparation).

[34] Dorfman, R., ed.. Measuring Benefits of

Government Investment (Studies of Government Finance, The Brookings Institute,

Washington, D,C., 1965).

[35] Samuel son, P. A., The pure theory of

public expenditure, Rev. Econ. Stat. 3i5, - No. 4, 387 (Nov. 1954).

[36] Samuelson, P. A., Aspects of public ex- penditure theories. Rev. Econ. Stat. 40^, 332 (Nov. 1958).

[37] Buchanan, J. M. , The Demand and Supply

of Public Goods (Rand McNally, Chicago,

111., 1968).

[38] Johnson, H. G., Federal support of basic research: some economic issues, book,

Basic Research and National Goals: A Report to the Committee on Science and Astronautics, U. S. House of Representatives

(National Academy of Sciences, Washington,

D.C., March 1965).

[39] Scherer, F. M. , Government research and

development programs, book, Measuring Benefits of Government Investments, Dorfman,

R, D, ed., pp. 12-57 (Brookings Institute,

Washington, D.C. , 1965).

[40] Marschak, T. , Glennan, T., K. , Jr., and

Summers, R. , Strategy for R&D: Studies

in the Microeconomics and Development

(Sprenger-Verlag, New York, N.Y., 1967).

[41] Chase, S. B. , Jr., ed., Problems in

Public Expenditure Analysis (Brookings

Institute, Studies of Government Finance,

Washington, D.C. , 1968).

[42] Joint Economic Committee of the U.S.

Congress, Benefit-Cost Analysis of Federal

Programs (U.S. Govt. Print. Off., Washington, D.C, , 1973).

[43] Havenar, R, , and Margolis, J., ed.,

Public Expenditures and Policy Analysis

(Markham Publishing Co., Chicago, 111.,

1970) . [44] Science Policy Research Division, Library of Congress; National Bureau of Standards, A Review of Its Organization and Operations: A Study Prepared for the Subcommittee on Science, Research, and Development

of the Committee on Science and Astronautics,

U.S. House of Representatives (U.S. Govt.

Print. Off., Washington, D.C, Sept. 8,

1971) . [45] Risley, A. S. , The National Measurement

System for Time and Frequency, Nat. Bur. Stand. (U.S.), Spec. Publ . 445-1, 76 pages

(May 1976).

[46] Bennett, J., The economic impact of

standard reference materials, NBS internal

working document.

[47] Stewart, Charles T. , Measurement Activity

and Changes in Industrial Productivity,

NBS internal working document, ^-j
NBS-1 14A IRE V. 7-73)

U.S. DEPT. OF COMM.

BIBLIOGRAPHIC DATA

SHEET NBS IR 75-948

2. Ciov 't Act'fssioii No.

3. Recipient's At cc.ssu>n Nt).

Economic Analysis of the National Measurement System

5. Publication Date September 1977

6b Performing Organization C oJe 270.00

7. AUTHOR(S1 „ . . , Barry W. Poulson, editor

8. Performing Organ. Report No.

y. Pr-l\rUKMlI\ti UKOAi\I/.Al lUPsI [\AMll Ai\lJ AUUK too NATIONAL BUREAU OF STANDARDS

DEPARTMENT OF COMMERCE

WASHINGTON, D.C. 20234

10. Project/Ta.sk/ Work Unit No. 2700916

11. Contract/Grant No.

1 / ^puil^tUllIlg ^\T\ r\r\ G r\r y r\ n 1 If n in \ "7 Ckt ^ f\r\ M a mn o n 1 f\ tm \ ^ a n r\ r- a c- traa t t. i ttf .T^a^^i X / \ \Jl ^ tim^ allKjil L\ alllL, ailCJ DllipiCLC '^UtirCIss (*JirC?trt, t ly ^ <f lalti j ^ I l j 13. Type of Report & Period Covered

14. Sponsoring Agency Code

15. SUPPLEMENTARY NOTES

16. ABSTRACT (A 200-word or less factual summary of most si^ificant information. If document includes a significant

bibliography or literature survey, mention it here.) Jhis report is a comprehensi ve suiTimation of all

relevant work known to NBS on the state of the art of economic analysis of the national

measurement system. It is written for a mixed audience of economists and physical scientists. The first part deals with the concept of measurement for economic analysis,

the quantitative dimensions of measurement in the economy, and the relationships between

measurement and economic change. Measurement information is ubiquitous in the economy;

it is used by producers and consumers and as an input at the interface between buyers

and sellers. Resources used in making measurements cost about 6 percent of GNP in 1963,

and all major economic sectors incurred substantial expenses. Industries with rapid

rates of growth and productivity advance tend to be measurement intensive. Data from

the NBS metric study provide supporting insights. The second part of the study examines

the measurement system from the standpoint of the private sector, including the economic

rationale for measurement by producers, consumers, and in sales transactions; and case studies of costs and benefits. The third part deals with the role of government, incorporating an economic rationale for measurement activities in the public sector, and case studies of costs and benefits of activities by NBS. Information provided by measurement

may be a public or collective good, and be accompanied by external economies; under such

conditions the private market system may not allocate resources efficiently and governmental intervention may increase the general welfare. While none of the case studies

satisfies the conditions of rigorous cost benefit or cost effectiveness analysis, they

do provide insight into the economic role of NBS in the national measurement system.

17. KEY WORDS (six to twelve entries; alphabetical order; capitalize only the first letter of the first key word unless a proper name; separated by semicolons

)

Economics; information; NBS; national measurement system.

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