Economic Analysis in Transportation Systems

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Economic Analysis in Transportation Systems
CE 7640 Fall 2002

• Tapan K. Datta, Ph.D, P.E.

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Demand

• Demand for highway transportation
• Same concept as demand for goods and services
• We pay a price to satisfy our travel demand

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Components of Demand (Traffic Demand)

• 1. Existing Traffic
• 2. Diverted Traffic
• 3. Generated Traffic
• 4. Growth or Decline

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Traffic Demand

• 1. Existing traffic traveling at a lower cost
• 2. Traffic gets diverted to a new and improved
  road
• 3. New destinations are created due to new or
  improved roads
• 4. Natural growth or decline must be accounted
  for in the estimation of demand

Unmet Demand
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Demand Curve

• Relationship between
• Vehicles per hour (vph)
• Cost of trip
• Time

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The cost of travel changes over time of day, day
of week, seasons and etc.
1 yr. 6 yrs. 11 yrs. 16 yrs. 21 yrs. 26 yrs. 31
yrs.
Price (cost)
X
Veh/hr
These show growth of traffic

• Cost of travel changes with age of facility
• - since volume is a function of price/cost
• As cost of travel reduces
• -volume increases
• -the curve shifts.

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Optimum Traffic Volume
Marginal Cost
Demand
D
Price/Cost
X1
Avg. Total Cost
C2
X2
C1
D
Avg. Fixed Cost
O
V2
V1
V
Volume (VPH)
Optimal Volume
Marginal Cost is the rate of change of cost per
unit increase in volume
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Optimum Traffic Volume

• If Traffic Volume OV1
• Cost/Trip OX1
• Marginal Cost OC1
• If price is slightly reduced, then volume
  increases
• For price OX2 ? volume is OV2
• Marginal Cost OC2
• Since OC2 is greater than OX2
• The additional trips are not worth its cost

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Nature of Costs

• 1. Cost of Highway
• - Construction
• - Maintenance
• - Operation
• 2. Cost of Vehicle Operations
• 3. Users Personal Costs

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Fixed Costs

• Right-of-Way
• Development costs
• Planning and Design
• Construction costs
• Maintenance costs
• Administration costs
• Cost of Operation
• Loss of Property Tax

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Variable Costs

• Vehicle Costs
• Fuel Costs
• Maintenance
• Wear and Tear
• Insurance
• Community Costs
• Loss of Amenity
• Air and Noise Pollution

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Marginal Cost
Avg. Total Cost
Avg. Variable Highway Costs
Price/Cost ()
Avg. Fixed Cost
O
Volume (VPH)
Marginal Cost is the rate of change of cost per
unit increase in volume
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Chapter 2

• Economics
• Social science that studies the production
  distribution and consumption of commodities
• Economy
• Thrifty or economical use of material resources

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Engineering Economy

• That phase of engineering which involves
  engineering works, equipment and processes to
  determine the relative amount of the net economic
  gains.
• Process of comparing engineering work using
  compound interest to arrive at a measure of
  profitability of the proposal.

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Engineering Economy in Highways

• Construction should be planned with an eye for
  the future
• Roads should be built only to the extent and of
  such types as will pay themselves.
• There must be enough traffic and type of
  improvement shall be such that the savings in
  cost of transportation is at least equal to the
  cost of improvement.

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Basic Premise of EngineeringEconomy

• Economy
• 1. Instinctive desire to save
• - Save for future use
• - Save for different use
• 2. Conservation of commodities
• - Future use
• 3. Conservation of Labor
• - Alternative use

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Basic Premise of Engineering(Continued)

• 4. Long range result of conservation of
  resources
• - Growth with least amount of resources
• 5. Public versus Private
• - Public viewpoint - Welfare of everyone
• - Private viewpoint - Welfare of one

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Principles of Analysis

• 1. Complete Objectivity
• - Selection of Factors
• - Selection of Cost
• - Selection of Vest Charge
• 2. Economic analysis is not a management decision
• 3. Hunch has no place in economic analysis
• 4. Study all possible alternatives

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Principles of Analysis (contd)

• 5. Always consider the Do Nothing alternative
• 6. Separate market and non-market factors
• - Factors of general socio-economic consequences
  are excluded from calculations
• 7. The analysis is a study of future conditions
• - Careful forecasting is necessary

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Principles of Analysis (contd)

• 8. Past events and investments are irrelevant.
• 9. Use same time periods for all factors
• 10. Analysis period should not extend beyond the
  period of reliable forecasts.
• 11. Same time frame for all factors
• 12. Differences in alternatives are controlling
• 13. Common factors of equal magnitude may be
  omitted

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Principles of Analysis (contd)

• 14. Use the net basis for all costs and
  consequences
• 15. Analysis for economy is independent of
  financing
• 16. Uncertainties need to be acknowledged
• 17. Separate decisions are made at separate
  levels of management
• 18. Viewpoints should be established before final
  decisions are made

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Principles of Analysis (contd)

• 19. Establish criteria for decision making
• 20. Consider all consequences to whomsoever they
  may accrue
• 21. Final decision should also consider market
  factors