Impact of Cost-Benefit Analysis on Industry Decision Making: Transportation
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
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
References: 1. Boardman, A.E. et al., 2006, Cost-benefit analysis: concepts and practice, Pearson Prentice Hall 2. Coursey, D. L. et al., 1987, The Disparity Between Willingness to Accept and Willingness to Pay -Measures of Value, The Quarterly Journal of Economics, Vol. 102, No. 3, pp. 679-690 3. Husdal, J, 2005, The vulnerability of road networks in a cost-benefit perspective. Proceedings of the the Transportation Research Board Annual Meeting 2005, Washington DC, USA, 9-13 January 2005 4. Jenelius, E. et al., 2006, Importance and exposure in road network vulnerability analysis, Transportation Research Part A: Policy and Practice, Vo. 40, Iss. 7, pp. 537-560 5. Lomax, T., et al., 2003, Selecting Travel Reliability Measures, Texas Transportation Institute and Cambridge Systematics Inc. 6. Prest, A. R., Turvey, R., 1965, Cost-Benefit Analysis: A Survey, The Economic Journal, Vol. 75, No. 300, pp. 683-735 7. Nas, T.F., 1996, Cost-benefit analysis: Theory and application, Sage publications 8. RISIT, 2004, RISIT – Risk and safety in the transport sector – A state-of-the-art review of current knowledge. White paper. The Research Council of Norway.