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TRANSPORATIION ECONOMICS

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When to Use Benefit-Cost Analysis:Economic evaluation (also called appraisal, assessment or analysis)
refers to various methods to determine the value of a policy,
program or project. It involves quantifying incremental (also
called marginal) economic impacts (benefits and costs) to
determine net benefits or net value (benefits minus costs), and
the distribution (also called incidence) of these impacts. Economic
evaluation is not limited to market impacts (which involve goods
that are commonly traded in competitive markets), it can also
incorporate non-market resources such as personal time, health and
environmental quality.

One of the most common economic evaluation methods is BenefitCost (also called Cost-Benefit) analysis, which
uses monetized (measured in monetary units) values to compare
total incremental benefits with total incremental costs. The results
can be presented as a ratio, with benefits divided by costs (which is
why it is often called Benefit/Cost or B/C analysis). Net Benefits is
defined as the sum of all benefits minus the sum of all costs, which
provides an absolute measure of benefits (total dollars), rather than
the relative measures provided by B/C Ratio.
To perform Benefit-Cost Analysis it is necessary to monetize all
relevant impacts. In recent years economists have developed
techniques for monetizing non-market impacts, and some
transportation agencies have adopted standardized values for travel
time, crash damages and environmental impacts.

Benefit-Cost Analysis is most applicable for evaluating proposed
projects that meet the following criteria:
(1) The potential project expenditure is significant enough to justify
spending resources on forecasting, measuring and evaluating the
expected benefits and impacts.

(2) The project motivation is to improve the transportation system's
efficiency at serving travel and access-related needs, rather than to
meet some legal requirement or social goal.
(3) Environmental or social impacts that are outside of the
transportation system efficiency measurement are either: (a)
negligible in magnitude, (b) measurable in ways that can be used
within the benefit-cost framework, or (c) to be considered by some
other form of project appraisal outside of the benefit-cost analysis.
During the last few decades Benefit-Cost analysis has been widely
used to evaluate transportation projects, and standardized methods
have been developed, including software programs such
as MicroBenCost and HDM-4 (CalTrans 2006; World Bank 2011).
These are generally designed to evaluate a particular type of
transport improvement, such as highways or transit service, and are
generally inappropriate for comparing the net benefits of
improvements to different modes or of transportation demand
management strategies such as pricing reforms or commute trip
reduction programs because they do not account for many
significant impacts. For example, conventional benefit-cost models
generally ignore parking facility costs, and therefore the parking
cost savings that result when travelers shift from driving to
alternative modes. Most models only account for changes in vehicle
operating costs, but ignore vehicle ownership costs, and therefore
the savings to consumers from improvements in alternative modes
that allow households to reduce their vehicle ownership. Most
include no factor for the social equity benefits that result from
improving basic mobility for non-drivers, for example, from projects
that improve affordable modes such as walking, cycling and public
transport. It is therefore important that people who use these
models and model results understand their limitations and biases.

Benefit-Cost Analysis is neither necessary nor desirable to justify all
transportation projects. It may not always be appropriate in the
following cases:
o Projects motivated by a need to meet legal requirements —
such as safety standards, handicapped access standards or
environmental impact standards. Changes in population

growth, urban development, travel patterns or legal
regulations may necessitate new projects to upgrade existing
transportation facilities and services, build new facilities or
provide new services to meet those current legally required
standards.
o Projects motivated primarily by a need to address
distributional equity concerns — i.e., legal, political or moral
desires for fairness. This includes the provision of some
minimum level of basic (road, transit, air or sea) access for
isolated or ill-served regions, communities or neighborhoods.
It can also include some projects motivated by economic
development, i.e., enabling the attraction and creation of new
jobs particularly in economically depressed areas. Finally,
some decisions are based on the desire (and in some cases,
the legal need) to avoid selection of projects and project
designs that focus undue negative impact on socially
vulnerable groups (such as low income, elderly, or minority
groups)
o Projects that are merely maintaining, renovating or
rehabilitating already-built transportation facilities, which are
necessary to avoid losing the already-demonstrated benefits of
those existing facilities (unless there are viable alternatives
present)

It is also inappropriate to rely solely on Benefit-Cost Analysis in
situations where there are special concerns that must also be
considered outside of that analysis. Since benefit-cost analysis
focuses on the comparison of total benefits and total costs in dollar
terms, some particular concerns affecting a given project may be
either hidden or missed within the calculation of total benefits and
total costs. In some cases, the desirability of projects needs to be
considered in terms of their effectiveness at reducing certain key
objectives — such as air pollution reduction, creation of new jobs, or
improving mobility for physically, economically and socially
disadvantaged people. In such cases, cost-effectiveness analysis
(which measures environmental or social benefits per dollar of
transportation project spending) may be appropriate, either in
addition to or instead of benefit-cost analysis.

BCA vs. Economic Impact Analysis:

Economic impacts are the effects a project or policy has on the
economy of a designated project area, measured in terms of the
change in business sales, jobs, value added, income,or tax revenue.
These effects are sometimes referred to as "economic development
impacts". Whereas Benefit-Cost Analysis is an exercise to determine
an action's social welfare effects (compared to costs), Economic
Impact Analysis is an exercise to determine how a project or policy
affects the amount and type of economic activity in a region.
Economic impacts can result from various sources, including time
savings to businesses, household and business vehicle operating
cost savings, the strengthening of local and regional market
connectivity, induced land development, or increased tourism. In all
cases, economic impacts arise because a transportation investment
causes a change in prices, a change in household behavior, or a
change in business behavior that improves business investment,
attraction, expansion, retention, or competitiveness in the study
area (when impacts are positive - of course, they can be negative as
well).

EXAMPLES :

o

A new highway connection makes it possible for a rural region to attract new
industry, creating jobs and tax revenue.

o

Eliminating size or weight restrictions for a river crossing, airport, or marine port
allows local business to expand shipping facilities, creating new jobs and tax
revenue.

o

Expanded transit service to a low-income residential area increases residents'
access to jobs, reducing unemployment, increasing income levels, and creating
tax revenue.

o

A new highway interchange makes an abandoned industrial area more accessible
and hence more attractive for office or industrial park redevelopment, leading to
higher tax revenues.

Relationship to Transportation System Benefit-Cost
Economic impacts are not included in benefit-cost analysis (with the exception of
productivity impacts, discussed below). Economic development impacts occur as the
end result of direct impacts of a transportation project on travelers and non-travelers. A
transportation project may improve local business competitiveness (and hence
economic growth) by reducing existing transportation costs (for employees and freight),
expanding markets for business sales and services (providing more revenue with
economies of scale in operations), and expanding labor market access (providing access
to a broader job base). A transportation project may also affect economic growth by
saving money for area residents (increasing available income to spend elsewhere in the
economy) or by improving the attractiveness of the area as a place for people to live
and locate their business activities.
Economic impact analysis differs from transportation system benefit-cost analysis in the
following ways:
o

Geographic Scope - EIA focuses on changes in economic activity to households and
businesses within in a well-defined study area (such as a County, Metropolitan Area, or
State). In contrast, Benefit-Cost Analysis typically takes a wider view, measuring benefits to
all users and non-users of a facility (regardless of where they live or work). Thus, BCA
typically takes a national, or even global view.

o

Scope of Direct Benefits - BCA takes a wider view of direct benefits than EIA. Through a
number of valuation methods, BCA attempts to capture welfare change of a project, even
when those do not generate follow-on economic activity. A common example is personal
travel time. BCA explicitly captures the value of time spent making a personal trip (for
example, driving to see your daughter play soccer). In EIA, this trip generates no follow-on
activity because if the traveler were not driving, she would otherwise doing leisure (nonproductive) activities. Environmental and noise pollution are other direct costs that BCA can
value, but are not included in economic impact analysis.

o

Scope of Follow-On Benefits - EIA takes a wider view of follow-on benefits than BCA.
Economic impact analysis generally separates impacts into three categories: (1) direct
impacts, which follow "directly" from traveler cost savings or other consequences of the

investment, (2) indirect impacts, which occur when industries that are directly affected buy
goods and services from other industries, and (3) induced impacts, which occur from
increased household spending due to higher regional wages. Impacts (2) and (3) are
considered "follow-on" impacts, and while they are typically included in EIA, they
are explicitly excluded from BCA.

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