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Office of Planning, Environment, & Realty (HEP)

Economic Development

Economic development refers to the policies and actions that promote economic goals within a specific geographic area. The term "economic development" has no specific definition in the Federal-aid highway program. However, the Declaration of Policy in 23 USC 101 states that "transportation should play a significant role in promoting economic growth, improving the environment, and sustaining quality of life."

The economic goals that transportation policies and projects can support are generally determined by local priorities. They are often very specific to needs identified by local decision makers, such as to increase overall employment in a local area, increase employment in a specific industry or economic sector, or increase employment within a specific area (e.g., in an identified "enterprise zone").

Some measures of economic growth and quality of life include things such as:

While these are useful indicators of the direction of the economy or as information for decision makers, they can be misunderstood or misused. For instance, construction jobs appear as a cost in some economic analyses, but as a benefit in others. And economic growth can be distinct from economic development. Relocated jobs are economic development for the area that receives them, but only considered growth nationally if they represent new activity that did not previously exist.

There are several tools available for planners to examine the economic effects of projects and plans, but one must be aware of what they estimate and their limitations.

Benefit-cost analysis

Benefit-cost analysis monetizes the benefits and costs of a project or policy, which allows comparison of alternatives in a common measure. It looks at the full range of benefits and costs that would result to residents of the United States from an action (e.g., a highway project) undertaken. The benefits and costs are discounted over the appropriate time frame, and compared for various alternatives. Benefit-cost analysis measures the efficiency of a project. A benefit-cost (B/C) ratio of 1.0 or greater indicates that society is better off with the investment (i.e., it is "efficient"), whereas one with a ratio lower than that means society would be paying more for the project that what it will yield. While the B/C ratio is a useful piece of information, the size of the net benefits--the absolute difference between projected benefits and costs--allow a better comparison of the efficiency of various alternatives.

Cost-effectiveness analysis

Cost-effectiveness is related to benefit-cost analysis. It compares the costs of various alternatives that achieve a specific level of benefit (for example, the relative cost of options that reduce fatalities in a corridor to a certain level). The option that achieves the target level at the lowest cost would thus be the most cost-effective.

Economic Impact Analysis

Economic impact analysis (EIA) looks at the effects a project or policy has on the economy and economic relationships within that economy. These analyses can be performed at various levels of analysis, including nationally, regionally, or even locally. In effect, EIA uses complex economic models that look at economic transactions within the economy that result from a project or policy and estimate economic outcomes. These models are often based on input-output (I/O) models, which look at relationships among industries related transactions to estimate the direct, indirect, and induced (i.e., multiplier) effects of an investment. There are several commercially available propriety models designed to produce estimates of changes to output, and translate them to changes in things such as employment and income.

Wider Economic Benefits

The consideration of wider economic benefits (WEB) captures some of the effects of transportation investments not generally estimated in benefit-cost analysis or macroeconomic models. These WEB represent economic benefits of structural changes to the economy that transportation can facilitate, including agglomeration effects, increases in employment, structural employment changes, productivity increases.

Useful Links

Benefit-Cost Analysis Information

The Office of Management and Budget has issued guidance on how to properly conduct economic analyses in support of Federal programs. The guidance includes discussions of analytical approaches, proper methods, discount rates, distributional effects, measuring benefits and costs.

OMB Circular A-4, Regulatory Analysis:

OMB Circular A-94, Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs:

The U.S. DOT Policy Office has issued guidance specific to benefit-cost analysis specific to U.S. DOT programs. This guidance was issued to help those applying for Transportation Investments Generating Economic Recovery (TIGER) discretionary grants.

The TIGER BCA Guidance includes information on proper methodologies, calculating present values, discounting, and types of benefits to consider:

The TIGER BCA resource guide provides recommended monetized values, technical methodologies, and frequently asked questions for TIGER grant applicants:

The Transportation Research Board Transportation Economics Committee (ABE20) has an excellent website, which a great deal of information on benefit-cost analysis in the transportation field:

The FHWA's Office of Operations benefit-cost analysis webpage has materials, examples, and guidance on BCA for operational strategies (traffic management, travel demand management, ITS, etc.).

The FHWA's Office of Transportation Performance Management maintains a webpage with information on evaluating highway investments, including life-cycle cost analysis.

Tools for Estimating Wider Economic Benefits

The American Association of State Highway and Transportation Officials (AASHTO) hosts EconWorks, which was developed under the SHRP2 program's Economic Analysis Tools Bundle. EconWorks includes a case study database of over 100 projects that document the economic development benefits of actual projects, along with spreadsheet-based tools that can estimate some of the wider benefits of projects and online training resources.

The National Cooperative Highway Research Program (NCHRP) conducted a study on Assessing the Economic Benefit of Transportation Infrastructure Investment in a Mature Surface Transportation System. The report can be found here:

Updated: 5/11/2016
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