'-' '^^^ '^^'^rds Reference book not to be

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NBS TECHNICAL NOTE

294

Notes on the State-of-the Art

of Benefit-Cost Analysis as

Related to Transportation Systems

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JOSEPH D. CRUMLISH

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U.S DEPARTMENT OF COMMERCE

National Bureau of Standards
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UNITED STATES DEPARTMENT OF COMMERCE • John T. Connor, Secretary

NATIONAL BUREAU OF STANDARDS • A. V. Astin, Director

NBS TECHNICAL NOTE 294

ISSUED NOVEMBER 1, 1966

Notes on the State-of-the Art

of Benefit-Cost Analysis as

Related to Transportation Systems

Joseph D. Crumlish

Technical Analysis Division

Institute for Applied Technology

National Bureau of Standards

Washington, D.C., 20234

NBS Technical Notes are designed to supplement the Bureau's regular publications program. They provide a means for making available scientific data that are of transient or limited interest. Technical Notes may be

listed or referred to in the open literature.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C., 20402

Price 30 cents.
FOREWORD

Benefit-cost analysis attempts to help decision makers evaluate

the possible consequences of alternative decisions. We present this

paper with the aim of informing policy makers on the nature, goals,

advantages, and limitations of this kind of analysis. It should be of

general interest to those concerned with transport policy and of

particular interest to the U. S. Department of Commerce's Office of

High Speed Transportation -- sponsors of the Northeast Corridor

Transportation Project, for which the National Bureau of Standards is

providing a simulation and benefit-cost analysis.

CONTENTS

Page

Abstract 1

1. Introduction 1

2. Transport Studies in General 3

3. Benefit-Cost Analysis in Particular 9

3.1. Water Resource Development Studies 14

3.2. Highway Benefit-Cost Analysis . 23

4. Summary 32

5. Appendix 34

5.1. Appendix References 38

6. Literature Cited 40

11
NOTES ON THE STATE-OF-THE-ART OF BENEFIT-COST ANALYSIS

AS RELATED TO TRANSPORTATION SYSTEMS

Joseph D. Crumlish

This review of benefit-cost analysis as a tool for evaluating alternative courses of action describes the technique,

discusses a number of benefit-cost studies, and indicates the

difficulties inherent in this area of applied economics. The

author concentrates on the application of the technique to

large scale transport problems, reviews the literature and

indicates in his conclusions where the technique can be helpful and where there is little chance for its success. An accompanying matrix of benefit-cost studies and a com- mentary thereon is supplied by Marsha Geier, an NBS economist.

Miss Geier 's literature search failed to produce any analytic

methods which were comprehensive, theoretically justifiable,

operational or significant. This finding tended to support

the views of the author. (Introduction by Alan J. Goldman,

Applied Mathematics Division, Institute for Basic Standards,

National Bureau of Standards.)

Key Words: Benefit-cost analysis; Transportation economics;

Transport systems; Systems Analysis; State of the

Art

1. Introduction

Alan J. Goldman

Benefit-cost analysis is not a well-defined set of proven techniques

with a widely agreed-upon range of applicability. Rather, it is a

currently evolving general approach to selecting from among alternative

projects (or programs), or from combinations thereof. Its characteristic feature is a stress on identifying and weighing as many as possible

of the significant benefits and costs associated with each alternative.
This may be contrasted with an emphasis on meeting some postulated

requirement regardless of cost, or at minimum cost, or with awareness

of only a restricted class of costs and benefits (e.g., those only to

the users of a transportation system)

Ideally, such an analysis should take into account indirect effects

of policy choices, and intangible effects not easily measurable in

numerical terms, as well as the more obvious and readily quantifiable

consequences. The possibility of achieving such comprehensiveness, and

the appropriate methods for doing so, remain topics of lively controversy,

There is alsp a need to allow for the varying uncertainties and

risks of the costs and benefits of different alternatives. Their

respective dispersals over time must be considered as well. The feasibility and choice of formulations for these purposes is again a matter

of (constructive and stimulating) dispute. Even where numerical costs

and benefits are easily ascertainable, there is no real consensus as to

what mathematical formulas should be used to convert them to a single

"rating number" for each alternative, or to a manageably small set of

such ratings. For example, the frequently-used benefit/cost ratio is

held by many distinguished practitioners to be seriously inadequate as

a rating index.
The fact that benefit-cost analysis exhibits sich a high proportion

of "topics in ferment" to tested principles may be disturbing; one would

prefer procedures of more thoroughly demonstrated ability to produce the

"one best answer." Probably the ferment and controversy are basically

healthy, in that they focus attention on the interaction between analyst

and policy-maker as the latter carries out his key responsibility:

setting the criteria by which the choice among alternatives is to be

made. The foundational problems just described are of course far from

the only sources of difficulty in specific applications; many of the

question marks in these studies stem from data deficiencies, and others

from current imperfections in our predictive abilities. These too

affect profoundly the results and direction of benefit-cost analysis:

for example, there is not even agreement on whether current transport

choices can affect significantly the path of further economic development of a highly developed region.

2 . Transport Studies in General

During a recent visit to the National Bureau of Standards, Benjamin

H. Stevens, regional economist from the University of Pennsylvania, said

that transportation's greatest need today is for research on how to

investigate transportation problems. In his opinion there is no one who

knows how to do an economic impact study of the Northeast Corridor.

That is, however, only the result of the fact that economics, which he

called the most precise of the social sciences, is in reality a highly

intuitive art. The metropolitan transport studies, which represent the

work most analogous to Corridor research, are still only experimental.
Their underlying theory is yet in the early stages of development, and

their models require data that are unavailable or at least unusable in

their present form.

Stevens • views update those of the Woods Hole Conference on "System

analysis in transport planning from transport design considerations,"

August 1960, sponsored by the National Academy of Sciences and the

National Research Council:

An assessment of the evidence presented in this study

gives emphasis to the necessity for achieving a more precise understanding of transportation, including its

relationship to the political, social and economic

activities of the nation.

To clarify this relationship is an important aim of transportation

benefit-cost analysis. In addition,

. . . the generation, collection and processing of

data are prerequisite to the formulation of practical

analytical and conceptual frameworks which in turn

give efficient guidance to the kind and extent of data

needed. -^

Available data appear inadequate in a number of respects, to permit

meaningful evaluation and projection of performance, cost, and responsiveness to measurable public demands of various transport systems.

Data are lacking to describe and evaluate the relationship of transport

to such socio-economic factors as urban and metropolitan development.

"Conference on Transportation Research, Report of a Study Group

convened by the National Academy of Sciences at Woods Hole, Massachusetts , August 1960 (Publication 840; Washingtc.i; National Academy of Sciences - National Research Council, 1960), p. 51.
location of industry, personal safety, defense, etc. Conventional transport cost accounting is inapplicable to this purpose. This deficiency

limits public and private ability to make informed choices among transport alternatives, because it forces analyses of present and future

possibilities into speculation, and may conceal the full range of

possible choices which would be revealed by analyses founded on an

adequate information base.

Data are needed not only on the physical characteristics of each

system considered and the nature of the service it performs, but also

on how it is operated, what adjustments can be made, and how well

different modes can be integrated within it functionally.

Any appraisal of a particular mode's performance or of the transport

system as a whole requires data measuring capacity and use as well as

data bearing on the operational factors which influence these quantities.

With the exception of information on major equipment items, most of these

data are not available.

Perhaps the greatest deficiency of past benefit-cost analysis is

the inadequate identification and treatment of quantitative factors which

are fundamental but which are not usually expressed in dollar terms.

These include social costs, such as smog, deterioration of the city and

countryside, and improper use of land. They also include social benefits.
Looking at the environmental and institutional framework of transportation, ^ Harvey S. Perloff of Resources for the Future points out the

need for a fruitful interchange among the social sciences, natural

sciences, and technology to help bring about a more precise description

of the values of urban living, clarify the interrelationship of transport

and urban development, and aid in devising models to simulate the interaction of public policy with known social and economic forces in the

society. To achieve these ends, however, extensive work is needed to

establish analytical principles, gather and examine data, and develop

necessary mathematical formulae and computer programs.

Perloff and Lowdon Wingo, Jr. represent one viewpoint in a continuing transport debate. They maintain that a transport system cannot

be judged only on its ability to meet existing demand, because the system

will itself contribute to molding future transport activities, thus

shaping future demand. In evaluating developmental plans, they contend,

our first and most important concern is to state the long-run developmental objectives for the region which the system serves. We then ask

how a given system contributes to these objectives.

^Conference on Transportation Research, Report of a Study Group

convened by the National Academy of Sciences at Woods Hole, Massachusetts , August 1960 (Publication 841; Washington: National Academy of SciencesNational Research Council, 1961), p. 103,

3 Lowdon Wingo, Jr. and Harvey S. Perloff, The Washington transportation plan: technics or politics (Reprint no. 34; Washington: Resources

for the Future, 1962), p. 5.
Benjamin Chinitz, Deputy Assistant Secretary of Commerce for

Economic Development, expresses another point of view: ... I see very little leverage left in transport in

fashioning the path of development. The corollary is

obvious: our main concern in the realm of public policy

is to provide the most efficient possible transport

system for a growing and changing economy. We can no

longer change the map; we can only adjust to it.'*

The issues in this debate are so fundamental that they require explicit

consideration by planners of future transport systems.

Melvin Webber adheres to the Perloff-Wingo point of view in saying

that transport effectiveness comes from contributing to the successful

functioning of the social order and to the production of that most intangible and most important commodity, social welfare:^

It would seem, as a minimum, that an evaluation of longterm consequences deserves at least equal consideration

to a transportation facility's capacity to carry expected

traffic loads and its impacts on users' operating costs.

The need for this kind of comprehensive, welfare-oriented, benefit-cost

analysis is particularly great in transport planning, Webber concludes.

Yet in no regional transport plan so far has any systematic attempt

been made to weigh costs and benefits on such a comprehensive basis.

'^Transportation Research Conference, loc. cit

.

, p. 107.

^Melvin W. Webber, "Transportation planning models," Traffic

quarterly , (July 1961) p. 385.

^Transportation Research Conference, loc. cit. , p. 162.
Why have such large-scale evaluations not been undertaken in the

crucial field of transport planning? In a summary review of major

metropolitan area transportation studies, Richard M. Zettel and Richard

R. Carll^ suggest that evaluation studies have been minimized, having

traditionally been thought of as a final major step in transport planning,

whereas most major transport studies have been concerned with problems

of preceding phases such as simulating transport systems, determining

modal split, and predicting demand. In addition, it is a far more

complex task to frame benefit-cost models than to frame predictive models,

because benefit-cost analyses include non- scientific institutional

considerations

Zettel and Carll found little systematic use of economic tools of

any kind in the 23 urban transport studies they reviewed. And it is

Lyle Fitch's conclusion that transport planning typically neglects to

examine all the alternative transport systems which could accomodate

user needs. In those it does examine, transport planning to date has

used benefit-cost analysis and other analytical tools partially and

imperfectly.^ Much of the benefit-cost analysis which has been used

has employed questionable methodological procedures.

''Richard M. Zettel and Richard R. Carll, "Summary review of major

metropolitan area transportation studies in the United States"

(Berkeley: Institute of Transportation and Traffic EngineeringUniversity of California, 1962), p. 63,

^Lyle C. Fitch and Associates, Urban Transportation and Public

Policy (San Francisco: Chandler Publishing Company, 1964), p. 118-119.
Nowhere has benefit-cost analysis been applied to whole new transportation layouts, such as those proposed by the

National Capital, Pittsburgh, and other urban transportation

studies. Little attention has been given to such basic

questions as how much of the travel in an urban community is

sufficiently important to justify the cost of providing

additional facilities to handle it. To be sure, the technique

for such global analysis has yet to be developed

nonetheless, the question is crucial and needs to be attacked

with all available tools and any new ones which can be

invented.^

Implicit in this is the point that not all desire for transport is

a "demand" in the sense of an imperative which must somehow be catered

to. The variety of performance expectations is an important aspect of

the problem.

Zettel and Carll see signs of hope in new techniques for evaluation,

and particularly those developed in the areas of regional planning and

water resource use (see section 3.1.).

3. Benefit-Cost Analysis in Particular

Perloff and Wingo, Melvin Webber, and Henry Fagin (Executive

Director, Penn-Jersey Transportation Study) have all expressed dissatisfaction with narrow benefit-cost calculations based mainly on directdollar outlays and direct-dollar receipts or savings--calculations

common enough to transport studies. They believe meaningful evaluations

must sail beyond charted seas. Some explicit and quantitative ways of

appraising non -monetary values do exist, and maiy others appear to merit

study. Let us briefly survey the limits and capacities of benefit-cost

analysis as they appear to those who use it.

^Ibid.
Benefit-cost analysis can be characterized as the collecting and

organizing of data in accordance with a system of values, or "criteria,"

by which alternative courses of action are to be assessed. Essentially,

this kind of analysis attempts to do explicitly what people do implicitly

every time they make a decision about the future. Whereas private firms

aim to maximize profit, the decision rules of benefit-cost analysis seek

to maximize public benefits or general welfare. And, as John Krutilla

points out,-^^

The application of criteria for improving welfare cannot be

a mechanical or a compellingly logical activity. Rather,

it requires more intimate knowledge of the economy, experience, and highly developed intuitive sense than analysts

commonly possess . . . ^ -^

Benefit-cost analysis can help the decision maker with the following

kinds of decisions: (1) Should money be spent for a given purpose?

If so, (2) is this the most profitable way to spend that money? To reach

these decisions, the analyst must be able (1) to assess the economic

characteristics of a particular project or program, (2) to determine

which of a number of projects designed to serve a given purpose achieves

the purpose at least cost, and (3) to determine which of a number of

projects (or combinations thereof) designed to serve different purposes

confers the largest net benefit on the people of the area it serves.

^°John V. Krutilla, "Welfare Aspects of Benefit-Cost Analysis"

(Reprint no. 29; Washington: Resources for the Future, 1961), p. 233.

lllbid.

10
A great deal of data describing components of each alternative

project and various project sequences must be examined in order to give

a clear idea of what overall plan is best, or which contenders ought

evidently to be candidates for a subsequent selection stage.

The set of viewpoints from which the project or program effects are

examined is of basic importance. The viewpoint of the community at large

can differ from those of the operator and user. Projects which are large

in scope necessarily require a comprehensive approach to the evaluation

of benefits and costs, since at this level a greater variety of effects

present themselves. Needless to say, whatever viewpoint is taken should

be stated clearly in the analysis.

Roland McKean of the RAND Corporation says benefit-cost analysis

consists of five elements: (1) desired objectives, (2) alternative

systems to meet objectives, (3) costs entailed by each alternative,

(4) models to help trace out costs incurred and achievements provided,

and (5) criteria to identify the best system. -^^ Included in analyses

should be gains and costs measured in monetary units, other commensurable effects, effects that can be quantified but not in terms of a

common denominator, and non-quantifiable effects.

^^Roland N. McKean, "The economics of defense," Encyclopedia of

the social sciences (manuscript), unnumbered.

11
The process necessarily involves subjective judgments in groping

for an operational statement of the objectives, finding alternative ways

of attaining the capability, making preliminary cost estimates, testing

the impact on other objectives, and redesigning in the light of these

impacts

Benefit-cost analyses are less possible in applications where

uncertainties are great or where incommensurables are highly significant.

However, as aids to decision these analyses can sometimes point with

considerable clarity to improvements, even though neither they nor any

other techniques can identify truly optimal choices. They can help

eliminate really bad choices. They can provide a useful framework for

aiding decision makers to organize evidence and clarify their thoughts

and intuitions about alternatives. •'•^

Otto Eckstein of the President's Council of Economic Advisers finds

the most important use of benefit-cost studies to be negative: It provides an antidote to the "requirements" approach, which does not consider

costs. (There is always some cost the requirement is not worth.) In

addition, it focuses attention on the margins, where decisions are made.

It does not ask, "Is defense worth its cost?" but rather, "Would an

extra billion dollars of defense yield an important enough increase in

our strength to be worth the cost?"^*^

13 Ibid.

I'^Otto Eckstein, Public Finance ("Foundations of Modem Economics;"

Englewood Cliffs, N.J.: Prentice Hall, 1964), p. 25.

12
Can the benefit-cost principle serve to determine the proper allocation of resources for most public expenditures? "Unfortunately not,"

Eckstein replies. The monetary returns expected from investment in

facilities such as education, improved housing, and highways have not

so far yielded to reliable measurement. This is because their benefits,

in addition to being partly non-monetary, are diffused over both time

and space in a way that is difficult to trace, let alone measure. Thus,

Eckstein concludes, benefit-cost analysis can be useful mainly in evaluating expenditures for operations which have fairly concentrated and

quantifiable effects, such as those for flood control, electric power

production, postal operations, and some transportation and recreation

facilities. Most of these expenditures are in the public works field

where benefits are primarily economic, tangible, and measurable.

To this conclusion are opposed the views of those who say that

benefit-cost analysis must also account for intangible and nonquantifiable effects. Eckstein maintains that benefit-cost analysis is

too limited a tool to deal with these broader effects. Though his view

is not poles apart from the Roland McKean approach, it helps us to

understand better the dilemmas confronting practitioners of the art.

15

Ibid.

13
Eckstein and McKean are both well-known for their benefit-cost work

on water resource development. Indeed, the benefit-cost principle itself

was established in the Flood Control Act of 1936, in which the Corps of

Engineers was authorized to survey the payoffs and costs of alternative

programs. (Today, many studies later, when the federal government alone

spends nearly two billion dollars annually on water resource development,

confusion and controversy still persist.)

3.1. Water Resource Development Studies

The benefit-cost bible in this area. Proposed Practices For Economic

Analysis of River Basin Projects , is known as "The Green Book." It distinguishes between primary and secondary benefits, a distinction accepted

as valid by Robert Dorfman of Harvard, another leading benefit- cost

economist, but rejected by McKean and others as leading to confusion and

over- counting. Water resource agencies join in this controversy: the

Bureau of Reclamation counts secondary benefits; the Corps of Engineers

and the Department of Agriculture do not.-^^ (A similar battle rages in

highway benefit-cost studies.)

^^The Green Book distinguishes between the two concepts as follows:

primary benefits are the value of the immediate products or services

resulting from the measures for which project costs and associated costs were incurred. In the irrigation project illustration, the primary

benefits are the value of the wheat produced by the farmer. Secondary

benefits are the values added over and above the value of the immediate

products or services of the project as a result of activities stemming

from or induced by the project. The value of the bread over and above

the value of its wheat content would be a secondary benefit.

14
In bringing "The Green Book" up to date, the President's Water

Resources Council defines benefits as

. . . increases or gains, net of associated or induced costs,

in the value of goods and services which result from conditions with the project as compared to conditions without the

project. Benefits include tangibles and intangibles and may

be classified as primary or secondary.^''

Among the primary benefits to which water resource development may

lead, the Council includes these examples:

(1) Domestic, municipal, and industrial benefits (the amount users would be willing to pay for such improvements in

lieu of foregoing them)

.

(2) Increases in net income from agricultural production.

(3) Net contributions to public health, safety, economy, and

effectiveness in use and enjoyment.

(4) Recreation benefits, including the intangible values of

preserving areas of unique natural beauty and of scenic,

historic, and scientific interest.

(5) Net economic effect of changes in transport capability,

and in the productivity of forest, range, mineral, and

other resources

.

^''U.S., President's Water Resources Council, together with a statement by Sen. Clinton P. Anderson, Policies, Standards, and Procedures in

the Formulation, Evaluation, and Review of Plans for Use and Development

of Water and Related Land Resources , Document No. 97, 87th Congress.,

2nd Sess. , 1962, p. 9.

15
The council also calls for inclusion of measures of "redevelopment"

benefits: the value of labor and other resources required for project

construction which can be used in project operation, maintenance, and

added area employment during the life of the project, to the extent that

such labor and other resources would otherwise be unused or underused;

and the contribution which a project makes toward alleviating problems

and promoting economic growth and well-being, toward increased national

income and welfare, and toward regional growth and stability.

The above listing of possible benefits indicates the inability of

benefit measures fashioned thus far to quantify the full effects of

large-scale projects. For this reason one cannot make sweeping generalizations about the potential aid that analyses can provide or about the

formulation of analyses in connection with particular choices. So far,

there are no clear-cut rules for determining the list of actions that

should be considered or the scope of the systems into which the actions

should be fitted, just as there are no clear-cut rules for devising

appropriate criteria. '•^

^^Roland N. McKean, Efficiency in Government Through Systems

Analysis: With Emphasis on Water Resources Development ("RAND Corporation Study;" New York: John Wiley and Sons, Inc., 1958), p. 96.

16
Eckstein accepts the Green Book's ratio of benefits to costs as the

recommended basis for comparing projects, but McKean criticizes this

commonly used test on grounds that benefit-cost ratios reveal nothing

about the absolute scale of gains or costs. A Brookings Institute study

supports McKean 's view as demonstrating conclusively that a simple

benefit-cost ratio test will often prescribe investments which do not

produce the largest net benefits. The study notes that since some items

could well be considered as either a negative cost or a positive benefit

(reduced maintenance, for example), the way they are introduced into the

ratio may substantially affect the final ratio but still may not succeed

in measuring the gap between benefits and costs. Also, ratios are not

as meaningful as absolute value figures. A benefit-cost ratio for one

project could be 10:1 and for another 1.3:1, yet the increase in real

output could still be far greater for the second project. -^^

The Brookings study also supports McKean 's decision rule based on

the difference between the discounted present value of future benefits

and costs as one which invariably points to that project which will make

the maximum contribution to benefits under the same circumstances. Where

V° is the net present social value, B"^ the discounted present value of

the future stream of benefits, and C^ the discounted present value of

costs

,

vo = bo - cO .

^^Brookings Institute, The preparation and evaluation of transport

projects (not for publication), Washington: February 1965, pp 37-38.

17
Questions orxen overlooked are, "How long will the benefits be

expected to last, and over what time period are costs to be incurred and

at what rate of interest?" Since we know that a dollar spent today is

worth more than a dollar spent in the future, the difference between the

undiscounted and the discounted present value of future benefits and

costs cannot be ignored.

Just as the economist's approach to benefit-cost analysis is

broader than the highly specialized approaches of the accountant and the

engineer, the systems analyst's interdisciplinary point of view is often

broader than the economist's. This may account, in part, for the

21 slightly divergent viewpoints of Eckstein and McKean.

20Eckstein and McKean also differ in their choice of discount rates

to maximize present worth for a given investment budget. The distinction

between the two viewpoints is brought out clearly in McKean 's Efficiency

in government through systems analysis ( loc. cit

, p. 117). In all of

the issues discussed thus far, it is our belief that McKean 's is the

better view. Both Eckstein and McKean agree, however, that alternative

benefit-cost schemes must each be reduced to a single number, such as present worth, and further, that there is now no fully acceptable means of handling benefits and costs over time.

21

McKean, Efficiency in Government . . . loc. cit

, pp. 76-92.

There are two other commonly proposed criteria: equivalent annual net

benefits and internal rate of return. Both are more difficult to use than discounted present value of future benefits and costs.

18
22

McKean offers some general guidelines for choosing criteria.

Criteria at each level should be consistent with higher level criteria,

i.e., benefits and costs to users must be correlated to benefits and

costs to the system and the community. In addition, the criteria chosen

should not obscure spillover effects (effects on gains and costs of

other operations -- also called external economies and diseconomies,

social costs, or indirect effects). Finally, since costs are a sacrifice

entailed by use of existing resources, the analyst should guard against

erroneous concepts of costs or gains which may affect adversely his

choice of criteria, such as penalizing an alternative for costs

incurred in the past.

^^Ibid. , p. 96,

19
Discussing particular criteria, McKean notes that utility--the label

for whatever should ultimately be maximized--depends on a vast number of

variables. Since functional relationships among variables, and indeed

many of the variables themselves, are not fully known, the analyst cannot

devise any perfect, complete criteria for judging utility. What he can

do is to specify a variable on which utility is believed to depend, say

the level of real income, and then try to find what would happen to that

variable under alternative courses of action.

Failing that, he can seek a good index (such as maximum net profit

or maximum performance of defined tasks at a given cost) of what would

happen, under each alternative, to that variable. He may in some cases

be able to demonstrate that a certain relationship exists between this

index and the specified variable, such as between a transport system's

net profit and a region's real income. In other cases, he may be able

to offer only inconclusive evidence and make a rather weak probabilistic

statement which rests largely on judgment. But even given more conclusive evidence, his criterion is valid only in terms of that variable.

20
McKean also presents some suggestions for judging the usefulness of

various criteria for an analysis. If there is widespread agreement or

persuasive evidence that a variable specified is the most important one,

then the criterion associated with it takes on added significance. The

ability to measure in several kinds of units the effects of alternatives

on variables increases the value of an analysis. Still, criteria do not

provide a complete test of a course of action, but only a partial test:

a comparison in terms only of selected consequences, knowledge of which

are expected to be helpful to decision makers.

McKean offers these guidelines on other aspects of benefit-cost

analysis

:

On appropriate alternatives

(1) Decide on the scope of the systems to be examined, the scales

for examining them, and combinations of measures for assessing

them.

(2) Watch out for possible interrelationships such as the effects

of adopting one policy on the costs or gains from other policies,

especially if they are to be ranked.

On intangibles

(1) Try to show the value implicitly assigned to intangibles by

preference for one course of action over another.

(2) Devise indicators of the nature and magnitude of intangibles.

On uncertainty

(1) Explore ranges of outcome to which roughly the same degree of

confidence can be attached, even if subjective.

21
(2) Examine the possible effects of various innovations on the gains

or costs of the systems being compared. Examine the effects on

the systems supposing the budget were altered or certain other

relevant contingencies occurred. (A range of results, not a

unique outcome, is thus associated with each alternative course

of action.)

(3) Consider the game aspect of choosing one's course of action.

When we move, others adjust their policies accordingly, which

may affect the payoffs or costs of our move.

(4) Estimate costs of insuring against the more important unfavorable

contingencies.

(5) Look for "dominance" -- cases in which the same course of action

is best in all relevant circumstances (i.e., the occurrence of

major unfavorable contingencies, or modification of the task or

budget) . Dominance occurs when course of action A,, for example,

is superior to course of action A^ for all scoring criteria.

(6) Consider statistical uncertainties due to imperfect data or

estimation techniques. Have possible results of an action

emerge as a frequency distribution, not as a single • outcome.

(7) If other types of uncertainty do not dominate and if a comparatively detailed model seems advisable, use Monte Carlo techniques

to make repeated calculations to reflect the change elements in

various events.

22
In applying his experience with comparisons of military systems to

non-military problems, McKean has made a significant contribution to

benefit-cost analysis. That is why so much attention has been paid in

this paper to his findings. We now turn to an area in which formal

benefit-cost analysis has been going on for about 15 years.

3.2. Highway Benefit-Cost Analysis

Just as water resources people look to their "Green Book" for

guidance in the economic analysis of a project, highway organizations

look to their "Red Book."^^ This publication of the American Association

of State Highway Officials is used to justify needed expenditures and to

examine the comparative worth of proposed improvements in rural areas.

The book's major premise is that the economic desirability of any highway

improvement can be determined by calculating its effect on passenger car

operations.

Consideration is given to seven principal factors:

(1) Solvency of a system or group of systems of highways

(2) Land and community benefits from highways and their improvements

(3) Costs of construction or improvements of highways

(4) Costs of maintenance and operation of highways and their

appurtenances

^ ^American Association of State Highway Officials, Road User Benefit

Analysis for Highway Improvement (Washington: American Association of

State Highway Officials, 1960), p. 10.

23
(5) Direct benefits to road users in the form of reduced vehicle

operating costs and savings in time on improved highways

(6) Benefits to road users in the form of increased comfort and

convenience

(7) Benefits to road users in the form of over-all accident

reduction.

The manual finds it possible to treat only items (3), (4), (5), and

(6)^^ in detail, thus concentrating on relating road user benefits to

capital costs. The costs analyzed are direct costs in the narrowest

sense, thus showing the book's orientation to engineering rather than

to economic analysis.

A review of the field indicates that present practice among highway

departments varies widely with respect to the extent of reliance upon

economic analysis in decision making. ^^ There is a "shocking gap" in

the literature when one looks for guidance in studying the economic and

social consequences of expressways.^^

^'^Positive identification of values for assignment to degrees of

comfort convenience is not possible. Assumed confort and convenience

values are included in the vehicle operating costs in direct relation

to the type of operation.

^^R. G. Hennes, "Criteria for highway benefit analysis," presented

at the 44th annual meeting of the Highway Research Board, Washington:

January 1965, p. 7.61.

26lbid. , p. 7.73.

24
The works of Mohring and Harwitz,^^ Kuhn,^^ and Winch^^ have been

cited as three outstanding contributions to the literature dealing with

highway benefits. Mohring and Harwitz examine in some detail the many

changes in the functioning of society which are brought about by highway

improvement. Kuhn emphasizes project and system analyses. Special

attention is paid to "external and internal values," to "cost and gains,"

and to "the importance of pursuing high-level criteria." Although Kuhn

concedes the reality of political constraints which limit road decisions

to a set geographical area, he holds that

. . . a highway department--of whatever scope--which concerns itself solely with transport by motor vehicles, excluding all

other considerations, cannot consistently act in the general

public interest of its jurisdiction.

In the opinion of Robert G. Hennes, Professor of Civil Engineering

at the University of Washington,

[t]his trilogy [Mohring and Harwitz, Kuhn, and Winch] constitutes the most impressive exposition of thinking on highway

matters that has appeared since the internal combustion engine

transformed and personalized transportation in our society.

^^H. Mohring and Mitchell Harwitz, Highway Benefits (Evanston:

Northwestern University Press, 1962), pp. 1-209.

^^Tillo E. Kuhn, Public Enterprise Economics and Transport Problems

(Berkeley: University of California Press, 1962), pp. 1-243.

^^David M. Winch, The Economics of Highway Planning (Toronto:

University of Toronto Press, 1963), pp. 1-166.

25
On comparison with the sophisticated techniques discussed by McKean

(above), this does not speak well for the state of the art of benefitcost analysis in the highway area. Hennes goes on to say that the authors

are p:"oponents of a philosophy not yet current in highway policy, namely,

that the public interest is paramount in highway policy, and not the

interests only of the users. Hitherto, our highways have been built and

operated on the principle that the users are the ones whose interests

highways serve because they pay the full costs. He concludes that the

works of these authors provide a theoretical foundation for a more

broadly based highway policy. ^^

In addition to user studies, a body of over 600 research reports,

critical articles, books, etc., has appeared on the subject of non-user

or community consequences of highway development. Differing methodologies and lack of uniformity in the variables preclude anything but a

descriptive evaluation of the studies. It seems clear that highway

impact studies tend to double-count gains. Savings in fuel, time, and

vehicle wear-and-tear, and added user convenience and comfort (partly

as measured by user charge revenues) are put down as user gains from a

highway project. Gains such as land-value increases and lower costs of

production are listed as external benefits from the project. However,

R. M. Zettel has convincingly pointed out that almost all of the external

gains (general economic benefits) from highway projects looked at so far

^^Hennes, loc. cit .

,

p. 7.76.

26
are basically user benefits which have been passed on to other sectors

of the economy. In this way they are counted twice. ^^

Also, while increases in land value near new highways are typically

noted, possible decreases in land value elsewhere are hardly ever considered. That highway projects may merely create compensating positive

and negative effects has been obscured by long-term land-value increases

caused by postwar population growth, family formation, rising personal

incomes, and other general trends.

The greatest number of these studies analyzes the effects of bypasses. There are also urban radial freeway studies and a few beltway

studies, the most famous of which is the study of Route 128 around

Boston. The 128 study ascribes primarily to highway improvement, the

migration of industry into the freeway areas, and ignores many other

factors of possibly greater relevance. The location close to Route 128

of major research centers such as Harvard and MIT, for instance, and the

burgeoning of entire new space-related industries, imply economic causes

that are at most only partly associated with the beltway. ^^

^ ^Richard M. Zettel, "The incidence of highway benefits," in

Economic Analysis in Highway Programming, Location, and Design (Special

Report No. 56, Highway Research Board; Washington: October 1960), p. 150,

^^Edgar M. Horwood, Carl A. Zellner, and Richard L. Ludwig,

"Community consequences of highway improvement," Unpublished report.

National Cooperative Highway Research Program, University of Washington,

Project 63-2-2, 1964, p. 4.

27
Many of these studies have been criticized as being motivated by

the desire for public acceptance of the projects studied. Others were

initiated by state governments solely for the purpose of inquiring into

33 the question of special tax assessment districts. The studies show

no advance in methodology or broad understanding of the impact of highway development on the community (see Table 1) . The theoretical

economist could well dismiss virtually all of the highway economic

34 impact literature as lacking in significance.

As a first step in filling in our knowledge about the community

consequences of highway development, Robert M. Pashek has urged a study

of the effects of changes in fixed assets, such as land use, on the

income and employment of the community. Such a study is being conducted

35

by the Pennsylvania Regional Analysis Group at Penn State.

Professor Edgar M. Horwood's survey of community impact studies

concludes with this comment:

The community consequences studies at some point merge into

the general regional highway planning studies and will further

merge into the overall urban region studies that will characterize the coming decades. The spatially localized studies,

although limited in objective, must be conducted with a greater sophistication to protect the reputation of highway

agencies.

^ ^Ibid. , p. 106.

34

Ibid. , p. 14.

Robert M. Pashek, "Community consequences of highway improvement,"

(presented at the 44th annual meeting of the Highway Research Board,

Washington 1965), p. 7.
TABLE 1

GAPS IN KNOWLEDGE

I. Gaps in Knowledge Recognized by Interest Groups

The impact of highway development on

A. Local employment

B. Tourism

C. Wholesale trade area change

D. Agricultural production

E. Relocation of residents

F. Economic base of the community

G. Urban renewal (slum elimination)

H. Public service district area

(schools, fire districts, library

service, etc.)

II. Methodology Needs Perceived by Analysts

A. How to evaluate impacts of highway change apart from other economic

effects

B. Design or identification of control study areas

C. Possible electronic data processing methods

D. Standardization of research approaches for data comparability

E. Evaluation of air and ground rights over and under freeways

F. Assessments of noise damages

III. Gaps in Knowledge Recognized by Officials

A. Economic justification of frontage roads

B. Impact of billboard legislation on highway-oriented businesses

C. Impact of route adoption announcements on right-of-way costs

D. Economic justification for rural cattle underpasses

E. Land use impacts at interchanges (and logical controls)

F. Impact of urban area development on freeway service (i.e., congestion)

G. Impact of highway development on regional economic development

29
In his opinion, a new research program must be written which can lead to

a broader concept of community consequences.^^

The U. S. Agency for International Development has sponsored

a number of benefit-cost studies for proposed highways in developing

countries. A Brookings Institute review found every such study to be

fallacious. The outstanding weakness of benefit-cost analyses in the

studies reviewed was overestimation of benefits and underestimation of

costs. ^^ Benefit-cost ratios in virtually every study reviewed turned

out to be 1 or greater than 1. The result was a pseudo-scientific justification of every proposal. Other major weaknesses included:

(1) failure to define benefits precisely, (2) failure to distinguish

between financial benefits (e.g. monetary value which a banker would

consider in making a loan) and economic benefits (those which allocate

resources correctly), (3) failure to distinguish between intangible and

other indirect benefits and to evaluate them accurately, and (4) failure

to consider project interdependence (spillovers).

The report concludes that no definitive, explicitly formulated set

of criteria now exists by which capital projects on transportation can

be judged. Such guidelines as do exist are too general and are actually

fallacious in some respects. Criteria are needed^®

^^Horwood, Zellner, and Ludwig, loc. cit. , p. 115

^ ^Brookings Institute, loc. cit. , p. 18

^ ^Brookings Institute, loc. cit.

,

p. 42.

30
(1) To provide for consideration of a number of feasible

alternative solutions to any transport problem for a range of explicitly stated assumptions which are broad

enough to encompass both the most and least favorable

forecast of the behavior of the major variables. The

sensitivity of the variation of these assumptions

should be determined.

(2) To supply techniques for relating a proposed transportation improvement to the natural resources and to the

agricultural, industrial, and investment plans of the

economy within which it is to take place, and for

assessing its likely impact on the economy.

39 In a recent study of urban transportation benefit-cost analysis,

Lyle Fitch has concluded that though the complications of such techniques

are (and probably always will be) subject to wide margins of error, the

technique should not be eschewed on that account:

At the least, the attempt to evaluate all the factors bearing

on an investment decision from the standpoint of overall

community welfare will help guard against leaving important

factors out of consideration [as has been the case with most

transportation planning] , Benefit-cost analysis should not

be deprecated on grounds of fallibility: its purpose is to

lead to more informed judgments than would otherwise be possible.

These statements complete the circle and conclude this review of

benefit-cost analysis as an art. With all its conceptual and practical

difficulties some progress has been made. In learning the lessions of

the past, we hope to deal more effectively with the tasks of today and

tomorrow.

39 Lyle C. Fitch S Associates, loc. cit. , pp. 109-110

31
4 . Summary

These are major conclusions on the present state of benefit-cost

analysis which can be drawn from the literature.

(1) Data deficiencies limit ability to make informed choices

among transport alternatives.

(2) The largest conceptual difficulty is the identification

and measurement of social benefits and costs.

(3) Among the first and most important questions to be con- sidered in evaluating a transport system is, "What shall

be the long-run regional development objectives?"

(4) In no regional transport plan known to the author has any

systematic attempt been made to weigh benefits and costs

on a comprehensive scale.

(5) Benefit-cost analyses are less helpful where uncertainties

are great or where incommensurables are highly significant.

Nonetheless, areas in which extensive uncertainty exists

may be the ones in which careful and explicit assessment

of ranges of possible actions offer the most potential.

Incommensurables often can be dealt with qualitatively

in a fashion that is at least partially satisfactory.

(6) There are no clear-cut rules for determining the list of

actions that should be considered or the scope of the

systems into which the actions should fit.

(7) The commonly-used benefit-cost ratio is a misleading basis

for comparing projects. A better test is the difference

between the discounted present values of future benefits

and costs

(8) Current procedures for highway benefit- cost analyses are too narrow in scope to be useful in Corridor studies,

except in a limited sense.

32
(9) The literature now available for guidance in studying

the economic and social consequences for expressways

contains "shocking gaps." The theoretical economist

could well dismiss virtually all highway impact literature published thus far as basically inadequate.

(10) There seems to be no definitive, explicitly formulated

set of criteria for judging capital projects on transportation.

On the positive side:

(11) Benefit-cost analyses can provide an appropriate framework for decision makers to use in organizing the evidence and clarifying their thoughts and intuitions

regarding alternatives,

(12) Benefit-cost analysis should not be deprecated on grounds of fallibility: its purpose is to lead to more informed judgments than would otherwise be possible.

33
5. Appendix

Commentary on a Matrix of Benefit-Cost Studies

Miss Marsha Geier undertook an investigation of recent benefit-cost

studies in order to assess the analytic procedures currently in use in

such studies. She was particularly interested in

1) how comprehensively the method tried to measure a given cost or benefit,

2) how adequate the theory was which underlay the model, and

3) how easily data could be fitted to the model, if the model were theoretical in exposition.

The literature search was not exhaustive because of a lack of time;

yet it was broad enough to yield some useful generalizations. The results

are summarized in the matrix given as Table a.

The row entries identify the author or source of a particular

benefit-cost study. Complete references are given at the end of the

Appendix. About half a dozen are articles published by economists in

the professional journals; five are books; another five were published

under the auspices of the Highway Research Board; and the remainder are

studies published by various organizations, institutes, and individuals.

The columns are divided into three main categories: system, user,

and community. Each of these is subdivided into several relevant subcategories, such as capital costs for the system, the value of travel

time to users, or the growth of the economic community.

For each article or book shown in the matrix, a reference symbol

appears under each column heading which is discussed in that study. All

major categories considered in each book or paper are so indicated.

Thus, an entry [m. .] indicates that the j cost or benefit appears in

the i study. Symbols used are N, Q, T, or V.

34

p«.fliJii,j.a«H
An "N" indicates a numerical and monetary example, which may or may

not be based on a theoretical model. The actual values used in the

example may either be given or else derived in another model. A "Q"

means that the values presented are quantified but are non-monetary.

An example would be the results of interviews. "T" means that a theoretical model only is presented; a "V" indicates that the discussion is

entirely verbal, i.e., no model is presented.

There are 119 entries in 351 cells (27 studies and 13 columns), but

this small number may be misleading. Many studies were intended to

discuss only a particular benefit rather than to present a balanced and

complete benefit-cost analysis. Only N's and T's are analytically

interesting. And of the 119 entries, only 10% are T's and 46% are N's.

Furthermore, many of the N's designate studies which arbitrarily assume

a value in the numerical example and thus fail to derive one in an

analytical fashion.

Many of the theoretical studies are non-operational, in that they

require non-existent or unreliable data; some become unrealistic by using

many simplifying assumptions for the sake of a neat mathematical solution,

More than a quarter of the N's involve the use of assumed values. Thus

relatively few of the studies involve actual data or operational models

and in very few indeed are analyses presented. From the point of view

of the advancement of research techniques the literature search failed

to produce any analytic methods which were comprehensive, theoretically

justifiable, operational or significant. This tends to support the views

given in the body of this report.

35
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37
5.1. Appendix References

American Association of State Highway Officials, Road User Benefit

Analysis for Highway Improvements , Washington, D. C, 1960.

Arizona Highway Department, "Comparative Analysis of Annual Investment

and Annual User Costs for Four Proposed Study Locations of Interstate Route 10 Between the North Boundary Gila River Indian Reservation and Interstate Route 8 Near Casa Grande," May 1959.

Beckmann, Martin, Christopher B, Wins ten, and C. B. McGuire, Studies

in the Economics of Transportation , Cowles Commission, Yale University Press, New Haven, Conn., 1956.

Bevis, Howard W. , "Application of Benefit-cost Ratio to an Expressway

System," Highway Research Board Proceedings , 1956.

Brenan, Malcolm, and Claude Rothrock, "Principles of Highway Engineering

Economic Analysis," a paper presented at the 44th annual meeting of

the Highway Research Board, Washington, D. C. , January 1965.

Campbell, M. Earl, "Highway Research and User Benefit Analysis,"

Proceedings of Kentucky Highway Conference , 1959.

Chicago Area Transportation Survey, "Economic Analysis of Roadway

Improvements," written by George Haikalis, Chicago, 1962.

Economic Associates (1) , "Procedures for Evaluating the Comparative Costs

and Benefits of Alternative Programs for Meeting the Incremental

Transportation Needs of the Washington Metropolitan Area," prepared

for NCTA, Washington, March 1962.

Economic Associates (2) , "Report to the National Capital Transportation

Agency on Comparisons of Costs and Benefits of Alternative Transportation Systems in the National Capital Region," Washington,

June 1962.

Foster, C. D., and M. E. Beesley, "Estimating the Social Benefit of

Constructing an Underground Railway in London," Journal of the

Royal Statistical Society , Vol. 126, part 1, 1963.

Hewitt, J., "The Calculation of Congestion Taxes on Roads," Economica , Vol. 31, Number 121, February 1964.

Johnson, M. Bruce, "On the Economics of Road Congestion," Econometrica , Vol. 32, Number 1-2, January-April 1964.

Kuhn, Tillo, " Public Enterprise Economics and Transport Problems , University of California Press, Berkeley and Los Angeles, 1962.

38
Lockheed, Preliminary Report , February 11, 1965.

Management Science Center, "Interim Report Project 8-3, Highway Research

Board, for Quarter, July 1, 1964-September 30, 1964," Wharton School

of Finance and Commerce, University of Penna., Philadelphia,

October 12, 1964.

Mohring, Herbert, "Urban Highway Investments," in Measuring Benefits of

Government Investments , edited by Robert Dorfman, The Brookings

Institution, Washington, 1963.

Mohring, Herbert, and Mitchell Harwitz, Highway Benefits: An Analytical

Framework . Transportation Center of Northwestern University,

Northwestern University Press, Evanston, Illinois, 1962.

Moses, Leon and Harold Williamson, Jr., "Value of Time, Choice of Mode,

and the Subsidy Issue in Urban Transportation," Journal of Political

Economy , Vol 71, June 1963.

Reynolds, D. J., "The Cost of Road Accidents," Journal of the Royal

Statistical Society , Vol. 119, No. 4, 1956.

St. Clair, G. P., and Nathan Lieder, "Evaluation of Unit Cost of Time

and Strain-and- Discomfort Costs of Non-Uniform Driving," Highway

Research Board Special Report 56 , Highway Research Board, 1959,

Stanford Research Institute (1), "The Value of Travel Time for Passenger

Cars: A Preliminary Study," written by Dan G, Haney, Menlo Park,

California, January 1963.

Stanford Research Institute (2), "The Value of Time, for Passenger Cars:

Further Theory and Small Scale Behavioral Studies," Anderson, Haney,

Katz, and Peterson, Menlo Park, California, September 1964.

Stanford Research Institute (3), "Use of the Marginal Cost of Time in

Highway Economy Studies," prepared for Bureau of Public Roads,

written by David A. Curry, Menlo Park, California, June 1964.

Vaswani, Ram, "Value of Auto Transit Time in Highway Planning," Highway

Research Board Proceedings , 1958.

Walters, Alan A., "The Theory and Measurement of Private and Social Cost

of Highway Congestion," Econometrica, Vol. 29, No. 4, October 1961.

Winch, David M. , The Economics of Highway Planning , No. 16 in Canadian

Studies in Economics, University of Toronto Press, Toronto, Ontario,

1962.

Winfrey, Robley, "Concepts and Applications of Engineering Economy in

the Highway Field," Highway Research Board Special Report 56 , 1959.

39
6. Literature Cited

American Association of State Highway Officials. Road User Benefit

Analysis for Highway Improvement . Washington: American Association

of State Highway Officials, 1960.

Brookings Institution. The preparation and evaluation of transport

projects. Washington: February 1965. (Not for publication.)

Eckstein, Otto. Public Finance . "Foundations of Modem Economics."

Englewood Cliffs, N.J. : Prentice Hall, 1964.

Fitch, Lyle C. and Associates. Urban Transportation and Public Policy . San Francisco: Chandler Publishing Co., 1964.

Hennes, R. G. Criteria for Highway Benefit Analysis . (Presented at the

44th Annual Meeting of the Highway Research Board, Washington,

January 1965.)

Horwood, Edgar M. , Zellner, Carl A., and Ludwig, Richard L. "Community

Consequences of Highway Improvement." Unpublished report. National

Cooperative Highway Research Program, University of Washington,

Project 63-2-2, 1964.

Krutilla, John V. Welfare Aspects of Benefit-Cost Analysis . (Reprint

No. 29.) Washington: Resources for the Future, 1961.

Kuhn, Tillo E. Public Enterprise Economics and Transport Problems . Berkeley: University of California Press, 1962.

McKean, Roland N. "The Economics of Defense." Encyclopedia of the

Social Sciences . (Manus cript .

)

McKean, Roland N. Efficiency in Government Through Systems Analysis:

With Emphasis on Water Resources Development . A RAND Corporation

Study. New York: John Wiley and Sons, Inc., 1958.

Mohring, H. and Harwitz, Mitchell. Highway Benefits . Evanston:

Northwestern University Press, 1962.

National Academy of Sciences. Conference on Transportation Research.

Report of a Study Group convened by the National Academy of Sciences

at Woods Hole, Massachusetts, August 1960. Publication 840.

Washington: National Academy of Sciences -National Research Council,

1960.

National Academy of Sciences. Conference on Transportation Research.

Transportation Design Considerations. Selections from the Proceedings of the Transportation Research Conference convened by the

National Academy of Sciences at Woods Hole, Massachusetts, August

1960. Publication 841. Washington: National Academy of SciencesNational Research Cotmcil, 1961.

40
Pashek, Robert M. "Coiranunity Consequences of Highway Improvement."

(Presented at the Forty-fourth Annual Meeting of the Highway

Research Board, Washington, D. C, 1965.)

President's Water Resources Council. The Policies, Standards, and Procedures in the Formulation, Eyaluation, and Review of Plans for

Use and Development of Water and Related Land Resources . Together

with a statement by Sen. Clinton P. Anderson. (Document No. 97,

87th Cong., 2nd Sess.) Washington, D.C.: Government Printing

Office, May 29, 1962.

President's Water Resources Council. Proposed Practices for Economic

Analysis of River Basin Projects .

Webber, Melvin W. "Transportation Planning Model," Traffic Quarterly , July 1961.

Winch, David M. The Economics of Highway Planning . Toronto: University

of Toronto Press, 1963.

Wingo, Lowdon, Jr., and Perloff, Harvey S. The Washington Transportation

Plan: Technics or Politics? (Reprint No. 34. ) Washington:

Resources for the Future, July 1962.

Zettel, Richard M. "The Incidence of Highway Benefits." Economic

Analysis in Highway Programming, Location, and Design . (Special

Report No. 56.) Washington: Highway Research Board, October 1960.

Zettel, Richard M. and Carll, Richard R. Summary Review of Major

Metropolitan Area Transportation Studies in the United States . Berkeley: University of California, Institute of Transportation

and Traffic Engineering, November 1962.

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