Economic Analysis in Transportation Systems Tapan K. Datta, Ph.D, P.E. CE 7640: Fall 2002

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

1. Existing Traffic 2. Diverted Traffic 3. Generated Traffic 4. Growth or Decline Components of Demand (Traffic Demand)

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

Demand Curve  Relationship between  Vehicles per hour (vph)  Cost of trip  Time Volume Price

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. 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. Veh/hr Price (cost) $ These show growth of traffic = cost of travel, say at 6:00 pm X X

Optimum Traffic Volume D D Avg. Fixed Cost Avg. Total Cost Marginal Cost Demand Price/Cost Volume (VPH) V1V1 V V2V2 Optimal Volume C1C1 C2C2 X2X2 X1X1 O Marginal Cost is the rate of change of cost per unit increase in volume

 If Traffic Volume = OV 1  Cost/Trip = OX 1  Marginal Cost = OC 1  If price is slightly reduced, then volume increases  For price OX 2  volume is OV 2  Marginal Cost = OC 2  Since OC 2 is greater than OX 2  The additional trips are not worth its cost Optimum Traffic Volume

Nature of Costs 1. Cost of Highway - Construction - Maintenance - Operation 2. Cost of Vehicle Operations 3. User’s Personal Costs

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

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

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

Chapter 2 Economics: Social science that studies the production distribution and consumption of commodities Economy: Thrifty or economical use of material resources

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. Engineering Economy

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.

Basic Premise of Engineering Economy  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

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 Basic Premise of Engineering (Continued)

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

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 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 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 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 Principles of Analysis (contd…)