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Office of Planning, Environment, & Realty (HEP)
Cost-benefit analysis is a framework for considering a range of benefits and costs in monetary terms. A variety of analytical tools are available to assist in quantifying and monetizing the various benefits and impacts of transportation and land development policies. Since some impacts are difficult to monetize, the results of cost-benefit analysis are rarely the sole factor in determining whether a project or policy is worthwhile. Cost-benefit analysis can nevertheless serve as a useful tool in alternatives evaluation. It can be used to assess overall benefits, to compare the relative magnitude of specific costs and benefits, and to assist in prioritizing among alternatives.
In benefit-cost analysis, a stream of benefits and costs over a period of time is typically discounted to place it in current year terms. In this way, the value of benefits and costs that occur continuously can be directly compared to one-time costs such as highway construction costs. Common benefit-cost measures include benefit-cost ratio, net present value (NPV), and internal rate of return (IRR).
Cost-effectiveness analysis is related to cost-benefit analysis. Instead of attempting to enumerate all benefits in monetary terms, however, cost-effectiveness analysis focuses on one or more specific impacts, such as total emissions. A comparison is then made of the cost per unit reduction in the impact, e.g., cost per ton of pollution reduced. Cost-effectiveness analysis is most useful when one or a few impacts that are not easily monetizable are of primary interest.
A consumer welfare model is used to calculate the per-trip monetary value of user benefits for various regional transportation and land use alternatives. Benefits are calculated based on changes in travel patterns and transportation network characteristics.
Benefit-cost models calculate user benefits and external costs for alternative transportation networks or projects and compare them with capital, operating, and maintenance costs. User benefits, including time, operating costs, and safety costs, are based on differences in travel patterns and transportation network characteristics. Some models also include valuations for externalities such as emissions, energy, and noise.
These models are designed to compare alternative highway investment strategies by comparing user benefits with life-cycle capital, operating, and maintenance costs under different strategies. The models are commonly used to assess tradeoffs between system expansion and system preservation, as well as to evaluate the benefits of different overall levels of investment.
Other methods have been applied based in principles similar to those underlying the models in Method 1. However, these rely on some level of user programming of functions rather than coming as pre-packaged software.
Least-cost planning is an approach toward determining transportation alternatives that minimize total social costs. It includes the application of benefit-cost techniques, in conjunction with the consideration of demand reduction and supply expansion projects on equal footing. The least-cost planning approach is described in ECONorthwest and Parsons Brinckerhoff (1995). An application of least-cost planning to the Seattle area is documented in Nelson and Shakow (1996).
The AASHTO "Red Book" (AASHTO, 1977) provides guidance on user benefit analysis in transportation. This guidance is currently being updated. General guidance on cost-benefit analysis in transportation planning can also be found in Stopher (1976).
The Victoria Transport Policy Institute (VTPI) publishes a number of references on enumerating and valuing the various benefits and costs of transportation programs and policies.
Hagler Bailly (2000) contains a toolbox of models for conducting cost-benefit analysis as well as for forecasting economic development impacts. The toolbox also includes case studies of applications and a diagnostic tool to assist in choosing a model.
The January 22, 1999 issue of the Urban Transportation Monitor contains a review of 10 transportation evaluation software packages, including the cost-benefit models described above.