Impact of Cost-Benefit Analysis on Industry Decision Making: Transportation

Topics: Cost-benefit analysis, Cost, Costs Pages: 9 (3373 words) Published: November 26, 2010
Impact of Cost-benefit analysis on industry decision making: Transportation Cost-benefit analysis (CBA), in essence, is a tool for decision making. It can be applied to almost any kind of decision in any kind of field. In its most pure form, a CBA will aggregate the pros and cons (positive and negative effects) of a proposal, and, if the pros (benefits) outweigh the cons (costs), the proposal is viable. Usually, the analyst will assign monetary values to each of the costs and benefits, hence making the analysis easier to calculate, even if the cost and benefits per se are intangible, and thus, not directly expressible in money values. Problems often arise in how to assess the monetary values of both tangible and intangible effects, which may lead to skewed and biased results. One of the reasons for this is that most cost-benefit analyses are done so-called ex ante, before a project or proposal or policy is carried out or implemented. The use of cost benefit analysis in the transportation sector Cost-benefit analyses are widely used within the transportation sector. Albeit seemingly a new technique, one of the first to actually apply CBA was Dupuit, in France, in 1844, in his classic paper on the utility of public works (Prest, 1965). Since then, CBA has emerged as one of the most-used tools in deciding the viability of proposed infrastructure projects. A full CBA not only assesses the immediate impact and immediate costs and benefits (primary market effects), but also takes into account all externalities that are affected by said project (secondary market effects). Dupuit was also the first to introduce the concept of consumer surplus, a key element in economic welfare theory. Consumer surplus is defined as the difference between the maximum amount that an individual would be willing to pay for a good and the actual amount paid. On a standard supply and demand diagram, see below (taken from Wikipedia), consumer surplus is the triangle above the price and below the demand curve. These consumers are paying less for a good than the maximum that they would pay. Producer surplus shows up as a triangle below the price and above the supply curve, since that is the minimum price that a producer can produce that quantity with and still make a profit. Consumer surplusCombined, consumer surplus and producer surplus make up what is called social surplus, and a cost-benefit analysis seeks to identify the social surplus of the particular project that is subject to analysis. A cost-benefit analysis proceeds in four essential steps: (a) identification of relevant costs and benefits, (b) measurement of costs and benefits, (c) comparison of cost and benefit streams accruing during the lifetime of a project, and (d) project selection. In the first phase, all related costs and benefits are identified. The second stage then, entails valuing and pricing of both tangibles and intangibles. In the third phase, the present value of future benefits and costs must be calculated, and finally, projects are ranked according to some criteria, most often cost-benefit ratio and net present value. However, choosing which project to go forward with may not be straightforward. Sometimes, external effects may play a part in the final decision, and often there will also be a political or regional agenda that needs to be satisfied. In Norway, the Planning and Building Act requires the use of an environmental impact analysis for all major development projects. Albeit named “impact analysis”, in essence it is a full CBA, assessing both tangible and less tangible effects (Statens Vegvesen, 2006). Reliability and vulnerability = benefit and cost?

One issue of major concern in the transportation sector, which has gained interest recently, is the reliability of infrastructure systems. Road transportation is no exception, since road networks are the main backbone of modern society. Consequently, the reliability, or conversely, the vulnerability of any transportation...
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