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Economic Analysis Primer

Conclusion

The goal of this primer has been to describe the major principles, concepts, and methods for doing economic analysis of highway projects. The coverage of these subjects has been necessarily brief. For the interested reader, a wealth of additional information is available from publicly accessible sources.5 The material in this primer, however, will hopefully be sufficient to provide a learning framework, and to make the reader aware of several key points.

First and foremost, economic analysis provides valuable information to the planning, design, construction, preservation, and operation of the transportation infrastructure. The limited supply of transportation dollars must be invested in a manner that gives the greatest return to the public. The most objective way to accomplish this is to compare the benefits and costs of transportation projects through the standard unit of the discounted dollar over the life cycles of projects. As such, economic analysis is an integral component of any comprehensive infrastructure management methodology, such as Transportation Asset Management.

Benefit-cost analysis is the most comprehensive method to evaluate the reasonableness of highway projects in economic terms. In some cases, when it is clear that a project must be undertaken regardless of its cost (e.g., a critical bridge on an interstate highway must be repaired or replaced in kind), LCCA will reveal the most cost-effective way of accomplishing the project. Used properly and in coordination with other disciplines, these methods can accommodate everything from user delay associated with work zones to measuring the net benefits of new roadway capacity.

State agencies and other practitioners typically must invest some effort to establish the skills and procedures needed to conduct economic analysis. Once established, however, economic analysis integrates with existing planning, environmental, and engineering practices with minimal additional work. In fact, by directly addressing issues such as the effect of new highway capacity on traffic patterns or the justification for a project, economic analysis can considerably lessen agency workloads associated with designing projects to appropriate scale and demonstrating the need for such projects to the public.

Uncertainty is a complicating factor in economic analysis as it is in virtually every area of human endeavor. Uncertainty can be measured and quantified as risk through risk analysis methods. Using economic analysis to evaluate the net benefits of various risk reduction strategies can help agencies manage risk.

Finally, through the mechanism of the marketplace, the direct benefits and costs of highway projects will cause various indirect effects on local and regional economies, including impacts on employment levels, wages, business activity, and housing prices. EIA tools can measure these indirect effects of highway projects based on the findings of BCA. Indirect effects are often of major interest to decision makers and the public, and, particularly for large projects, can be presented in a complementary analysis to the BCA.


5 For instance, the FHWA Office of Asset Management Web site, http://www.fhwa.dot.gov/infrastructure/asstmgmt/index.htm, has links to many references for each of the subjects discussed in this primer.

Updated: 10/23/2013