Transportation Cost and Benefit Analysis – Evaluating Transportation Benefits

Victoria Transport Policy Institute (www.vtpi.org)

7. Evaluating Transportation Benefits

This chapter discusses techniques for quantifying transportation benefits, including benefits of
marginal cost savings, external benefits, consumer surplus benefits, economic productivity and
development, and benefits of transportation diversity.

Mobility and Accessibility Benefits

Mobility and accessibility provide tremendous benefits. Virtually every economic and
social activity involves transport. Some types of mobility, such as a life-saving trip to a
hospital or delivery of a valuable good or service, have extremely large benefits.

However, the existence of such benefits does not mean that all travel is highly valuable or
that increased mobility always provides net benefits (incremental benefits exceeding
incremental costs). As an analogy, eating is an essential activity which provides
tremendous benefits, but this does not mean that increased eating is always desirable, that
current diets are optimal, or that society should subsidize all foods. At the margin (i.e.,
relative to current consumption) many people are better off eating less, because
overeating is unhealthy and reducing food expenditures leaves consumers with more
money to spend on other beneficial goods.

Similarly, that transport provides benefits does not mean that more mobility is always
better. Beyond an optimal level, additional mobility provides declining and eventually
negative marginal benefits. Nobody would spend all their time and money on travel, nor
should a community devote excessive resources to transport facilities. As a result, the
greatest benefits to society can result from transport policies that favor higher-value
transport activities over lower-value transport activities, for example, by giving freight
and transit vehicles priority over private automobile traffic on congested roads.

Most transport decisions involve marginal changes: an incremental increase or reduction

in travel options, travel costs, and the amount of mobility that occurs. Once a basic road
system exists, most additional roadway improvements provide marginal reductions in
travel time, vehicle costs and crash risk. Similarly, a new transportation service, such as a
new bus or rail system, or a freight delivery service, provides marginal benefits compared
with the travel options that would otherwise be available.

As discussed in Chapter 3, benefits tend to be maximized in a market that reflects certain

principles, including consumer choice, efficient pricing and economic neutrality. High
levels of mobility do not necessarily reflect optimal benefits if transportation and land use
markets are distorted in ways that reduce transport options or underpricing vehicle travel.
More optimal markets, which maximize transportation benefits, require several reforms,
some of which would tend to reduce total vehicle travel.1

1EU, Towards Fair And Efficient Pricing in Transport, European Union (http://europa.eu.int), 1996; Todd
Litman, Socially Optimal Transport Pricing and Markets, VTPI (www.vtpi.org), 2000; “Market Reforms,”
Online TDM Encyclopedia, VTPI (www.vtpi.org/tdm/tdm29.htm), 2002.

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Mobility is usually considered a derived demand, that is, people travel to access goods,
services activities and destinations. However, there are indications that consumers
consider a certain amount of mobility to be enjoyable.2 People often walk, jog, bicycle,
motorcycle, drive, and travel by train, boat or airplane for the enjoyment of the activity,
with no destination, or a destination is mainly an excuse for the trip. Such trips probably
represent a minor, but not insignificant portion of total travel, and even larger share of
transport decisions are probably influenced by positive feelings people have for mobility.
For example, people may choose to drive alone rather than use a cheaper mode, accept a
longer commute, or be willing to take a non-essential business trip because they enjoy
travel. This suggests that a certain amount of travel activity may provide direct user
benefits, and that qualitative factors, such as comfort, interest, aesthetics, and physical
exercise may significantly affect the value of personal travel.

Cost Reduction Benefits

As described in Chapter 1, benefits and costs have a mirror-image relationship: benefits
can be defined as a reduction in costs, and costs can be defined as a reduction in benefits.
In practice, most marginal transportation benefits are measured based on reductions in
transportation costs. For example, the benefits of a roadway improvement are measured
based on the reduction in travel time and vehicle costs they provide. Vehicle safety
benefits are measured in terms of reduced crash injuries and deaths. This is why
transportation economic analysis generally starts by quantifying costs.

Standard models are available for calculating the benefits of a highway or transit
improvement, based on reductions in travel time, vehicle operation and crash risk costs.3
However, these models overlook some significant costs that vary with changes in travel
mode or total vehicle travel (see discussion in Chapter 3). For example, most do not
account for parking cost savings that result when travelers shift from automobile to an
alternative mode, or the reductions in crash costs that result when motorists reduce total
vehicle travel. As a result, such models tend to undervalue the full benefits of alternative
modes and mobility management strategies.4 Of course, the magnitude of these benefits
depends on the base case that is assumed. For example, alternative fueled vehicles may
provide energy savings and emission reduction benefits compared with the same trips
made by an average automobile, but not compared with travel by walking, cycling,
ridesharing or transit.

Transport cost reduction benefits include internal benefits (benefits to users from
financial cost savings, and reductions in travel time, discomfort and risk), and reductions
in external costs (benefits to others, such as reduced traffic congestion and crash risks).
These categories of cost reduction benefits are discussed below.

2 Patricia Mokhtarian and Ilan Salomon, “How Derived is the Demand for Travel?” Transportation
Research A, Vol. 35, No. 8, (www.elsevier.com/locate/tra), Sept. 2001, pp. 695-719.
3 TTI, MicroBENCOST, Texas Transportation Institute (http://tti.tamu.edu), 1997; World Bank, Highways
Design and Maintenance (HDM) 4 Model, World Bank (www.htc.co.nz), 2000.
4 “Comprehensive Transportation Planning,” Online TDM Encyclopedia (www.vtpi.org/tdm/tdm76.htm).

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Transport Affordability
Transportation affordability refers to users’ financial costs for basic transport. Improved
affordability provides financial savings to consumers, and is a critical equity objective,
since it affects the cost burdens and opportunities available to disadvantaged people.
Transport affordability is affected by the number of vehicles that a household must own,
the costs of owning and operating each vehicle, indirect costs such as residential parking,
and the quality and costs of alternative modes. Transportation cost savings are equivalent
to increased household income. For example, in an automobile dependent community, a
household with two employed adults needs to own two automobiles, costing
approximately $10,000 a year, but in a community with a more diverse transportation
system, the same household may only need one car, plus $1,000 in transit and taxi fares,
saving $4,000 annually, equivalent to more than $5,000 in additional pre-tax income.

Consumer Surplus Analysis

The value to consumers of reductions in their travel time, crash risk and discomfort can
be evaluated based on consumer surplus analysis.5 Consumer surplus refers to the net
benefit provided to users from a particular good at a particular price. For example, if in a
particular situation you would willingly pay up to $10 to reach a particular destination,
but your actual cost is $4, you would enjoy net benefits worth $6. If another person is
only willing to pay up to $5 for the same trip, their net benefit would be $1. The total
consumer surplus of the two trips would be $7.

When evaluating consumer surplus, benefits from trips that would occur anyway are
calculated at their full value, and benefits from trips that occur as a result of reduced costs
are calculated using the “rule of half,” as described in the box on the following page. For
example, a 50¢ per trip transit fare reduction would provide a $500 consumer surplus
gain from 1,000 transit trips that would have been made anyway (1,000 x 50¢), and a
$100 consumer surplus gain if this price reduction resulted in 400 additional transit trips
(400 x 50¢ x ½).

Consumer benefits tend to experience declining marginal benefits, meaning that unit
benefits decline with increased consumption. For example, a certain amount of mobility
(say, the first 5,000 annual miles of vehicle travel) can provide large benefits because this
will consist of consumer’s most valuable trips, but each additional thousand miles of
travel provides less benefit, because it consists of increasingly lower value travel. If the
price is low enough, consumers might choose very high annual mileage, but an increasing
portion of this travel will consist of low-value trips, that consumers would willingly
forego if given modest incentives.

5Kenneth Small, “Project Evaluation,” in Transportation Policy and Economics, Brookings

(www.brookings.edu), 1999, available at University of California Transportation Center (www.uctc.net).

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Explanation of the “Rule of Half”

Economic theory suggests that when consumers change their travel in response to a financial
incentive, the net consumer surplus is half of their price change (called the “rule of half”). This takes
into account total changes in financial costs, travel time, convenience and mobility as consumers
perceive them.

Let’s say that the price of driving (that is, the perceived variable costs, or vehicle operating costs)
increased by 10¢ per mile because of an additional fee (e.g., paid parking), and as a result you
reduced your annual vehicle use by 1,000 miles. You would not give up highly valuable vehicle
travel, but there are probably some vehicle-miles that you would reduce, either by shifting to other
modes, choosing closer destinations, or because the trip itself does not seem particularly important.

These vehicle-miles foregone have an incremental value to you, the consumer, between 0¢ and 10¢.
If you consider the additional mile worth less than 0¢ (i.e., it has no value), you would not have taken
it in the first place. If its worth is between 0-9¢ per mile, a 10¢ per mile incentive will convince you
to give it up – you’d rather have the money. If the additional mile is worth more than 10¢ per mile, a
10¢ per mile incentive is inadequate to convenience you to give it up – you’ll keep driving. Of the
1,000 miles foregone, we can assume that the average net benefit to consumers (called the consumer
surplus) is the mid-point of this range, that is, 5¢ per vehicle mile. Thus, we can calculate that miles
foregone by a 10¢ per mile financial incentive have an average consumer surplus value of 5¢. A $100
increase in vehicle operating costs that reduces automobile travel by 1,000 miles imposes a net cost
to consumers of $50, while a $100 financial reward that convinces motorists to drive 1,000 miles less
provides a net benefit to consumers of $50.

Some people complicate this analysis by trying to track changes in consumer travel time,
convenience and vehicle operating costs, but that is unnecessary information. All we need to know in
order to determine the net consumer benefits and costs is to know the perceived change in price,
either positive or negative, and the resulting change in consumption. All of the complex trade-offs
that consumers make between money, time, convenience and the value off mobility are incorporated.

External Cost Reductions

As discussed in this guidebook, transport facilities and activities impose many external
costs, that is, costs not borne directly by users, including traffic congestion and crash risk
imposed on other road users, roadway and parking facility costs not funded through user
fees, pollution emissions, resource externalities and undesirable land use impacts.
Transportation system changes, such as improved facilities and vehicle design, alternative
fuels, and changes in travel time and mode, and reductions in vehicle mileage can provide
benefits from reduced external costs. This guidebook is intended to help incorporate such
external benefits in transportation decision-making.

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External Benefits
Advocates sometimes argue that because a particular transport policy or project deserves
subsidies because it provides external benefits. But such subsidies are only justified if
transport provides external marginal benefits that exceed external marginal costs, which
is to say, you benefit if your neighbors travel more. Most transport benefits are internal,
that is, benefits to the people or businesses that use a transport activity or service.
Economic studies have found few external benefits from vehicle travel, and virtually no
external marginal benefits that would justify significant underpricing of vehicle use in
economically developed countries.6

Even vehicle travel activity that provides indirect benefits, such as employees driving to
work or shoppers driving to stores, can only be considered to provide external marginal
benefits if a reduction in driving would reduce the total amount of economic activity that
occurs. For example, if employees who currently drive to work could otherwise commute
by walking, cycling, ridesharing, public transit or telecommuting, there is no external
benefit from automobile use; the benefit of driving over other modes consists of the
internal benefit to the commuter from the additional speed, convenience, comfort or
prestige they gain. Similarly, if shoppers who cannot drive on a particular road would
otherwise spend the same money at more local stores, there is no external benefit from
driving, only an economic transfer from one store to another. The next section discusses
ways to evaluate the economic development impacts of a particular transport policy or
activity.

Economic Productivity and Development Benefits

Transportation is essential for most economic activities, and transport decisions can have
major impacts on economic productivity. Various techniques can be used to estimate the
economic development benefits of a particular transport policy or project.7 In general,
projects that reduce transport costs to industry tend to increase productivity. For example,
a facility investment that reduces shipping costs, or a roadway management strategy that
gives freight and commercial vehicles priority over general vehicle traffic, are likely to
increase economic productivity. However, economic transfers (for example, using taxes
to subsidize shipping costs in an area or industry) will tend to increase productivity in
some areas and industries but reduce it in others (those that bear the taxes). Similarly,
improved accessibility may increase business activity and land values in a particular area,
but reduce business activity and land values in other areas, resulting in little or no
increase in overall economic activity.

6 Werner Rothengatter, “Do External Benefits Compensate for External Costs of Transport?”,
Transportation Research, Vol. 28A, 1991, p.321-328; Dr. Heini Sommer, Felix Walter, Rene
Neuenschwander, External Benefits of Transport?, ECOPLAN (Bern), March 1993.
7 Glen Weisbrod, Synthesis of Current Practice for Assessing Economic Development Impacts from
Transportation Projects, NCHRP Study 20-5 (www.edrgroup.com/pages/summary-synthesis.html), TRB,
National Academy Press, ISBN 0-309-06873-8, 2000; Phil Goodwin and Stefan Persson, Assessing
the Benefits of Transport, European Conference of Ministers of Transport; OECD
(www.oecd.org), 2001.

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Transport improvement are not always the best way to improve productivity or increase
economic development. In general, such improvements only increase economic
development where inadequate transport is a significant constraint on economic activity.
An area that lacks paved roads may experience significant economic growth from a new
highway or bridge that significantly reduces travel costs. However, highway
improvements tend to provide only marginal productivity benefits in regions that already
have comprehensive road networks (i.e., paved roads to most destinations, even if they
are congested during peak periods).8 Economic returns from highway expenditures have
declined below that of private investments, a trend that can be expected as the most cost
effective and beneficial projects have already been completed.9

Even if highway expenditures increase economic productivity, they are not necessarily the
best investment. Highway improvements can have harmful as well as beneficial impacts
on a local economy.10 Investments in alternative modes and management strategies that
encourage more efficient use of existing road capacity tend to provide more economic
benefit than expanding existing highways to reduce congestion. One major study found
that economic growth rates are higher in regions with more diverse, less automobile
dependent transportation systems.11 Demand management strategies that increase
transportation system efficiency, such as congestion and parking pricing, may be more
cost effective solutions to congestion problems, and so provide greater economic
development benefits, than continually expanding road and parking facility capacity.

Transport policies and projects tend to provide the greatest economic development
benefits if they reflect market principles, that is, if they increase transport options,
efficient pricing and economic neutrality. Transport policies that violate these principles
(such as underpricing or a lack of travel alternatives) may reduce overall economic
development, even if it increases mobility overall. Mobility management strategies that
increase transport efficiency often provide the greatest economic development benefits.12

8 Amy Helling, “Transportation and Economic Development; A Review,” Public Works Management &
Policy, Vol. 2, No. 1, July 1997, pp. 79-93; Marlon Boarnet, “New Highways & Economic Productivity:
Interpreting Recent Evidence,” Journal of Planning Literature, Vol. 11, No. 4, May 1997, pp. 476-486.
9 M. Ishaq Nadiri and Theofanis Mamuneas, Contribution of Highway Capital to Output and Productivity
Growth in the US Economy and Industries, FHWA (www.fhwa.dot.gov/aap/gro98cvr.htm), 1998.
10 Standing Committee on Trunk Road Assessment, Transport Investment, Transport Intensity and
Economic Growth, DETR (London; www.roads.detr.gov.uk/roadnetwork/heta/sactra98.htm), 1997.
11 Jeff Kenworthy, Felix Laube, Peter Newman and Paul Barter, Indicators of Transport Efficiency in 37
Global Cities, Murdoch University (Perth; wwwistp.murdoch.edu.au), for the World Bank
(www.worldbank.org), 1997; Peter Newman and Jeff Kenworthy, Sustainability and Cities; Overcoming
Automobile Dependency, Island Press (www.islandpress.org), 1999.
12 Todd Litman, Economic Development Impacts of Transportation Demand Management, presented at the
Transportation Research Board Conference on Transportation And Economic Development, Portland,
Oregon, May 5, 2002, available at Victoria Transport Policy Institute (www.vtpi.org).

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Diversity and Equity Benefits

Transportation Diversity (also called Transportation Options or Transportation Choice)
refers to the quantity and quality of transportation services available to an individual or
group, as discussed in Chapter 5.9.13 Improved transport diversity can provide a variety of
benefits, as listed below. A particular policy or project, such as pedestrian improvements
or increased transit service, often provides several of these benefits. Conventional
transport planning tends to focus on just one or two of these benefits at time, and so may
undervalue policies and programs that increase transport system diversity.

• Solving Transportation Problems. Improved options can help reduce traffic congestion,
facility costs, road risk, environmental impacts and consumer costs.

• Consumer benefits. Improved options allow consumers to save money, avoid stress, and
reduce their need to chauffeur non-drivers.

• Efficiency. Consumer choice is necessary for economic efficiency. Improved transportation

choice allows consumers to choose the most efficient option for each trip.

• Equity. Inadequate transport options often limits the personal and economic opportunities
available to people who are physically, economically or socially disadvantaged. Increasing
transport options suitable for use by non-drivers and lower-income people helps achieve
equity objectives.

• Livability. Many people value living in or visiting a community where walking and cycling
are safe, pleasant and common.

• Active transport modes (walking and cycling) tend to provide public Health benefits, by
increasing physical fitness.

• Security and Resilience. Improved transportation options results in a more diverse and
flexible transport system that can accommodate variable and unpredictable conditions. Even
people who do not currently use a particular form of transport may value its availability as a
form of insurance to accommodate future needs.

Improved mobility options for non-drivers and lower-income people tends to provide
significant efficiency and equity benefits, particularly in communities with automobile-
oriented transport and land use patterns.

13Todd Litman, “Evaluating Transportation Choice,” Transportation Research Record 1756,

Transportation Research Board (www.trb.org), 2001, pp. 32-41; also available at VTPI
(www.vtpi.org), 2001; FDOT, Quality/Level of Service Handbook, Florida Department of Transportation
(www11.myflorida.com/planning/systems/sm/los/los_sw2.htm), Feb. 2002.

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Benefits by Mode
Each mode tends to have a unique benefit profile. These are discussed below.

Average Automobile
High level of user mobility and convenience.

Compact Car
Somewhat more affordable and reduces some external costs (fuel consumption and
external crash risk) compared with an average automobile, otherwise provides similar
benefits.

Electric Car
Reduces some external costs (fuel consumption and pollution emissions) compared with
an average automobile, otherwise provides similar benefits.

Van or Light Truck

Greater carrying capacity compared with an average automobile, otherwise provides
similar benefits. Important for many economically productive activities (deliveries,
construction, tourism, etc.).

Rideshare Passenger
Lowest incremental costs. Does not require ability to drive and so provides equity
benefits.

Diesel Bus
Relatively low costs per passenger-mile compared with automobile travel, particularly
under urban-peak conditions. Does not require ability to drive and so provides equity
benefits.

Electric Bus/Trolley
Reduces some external costs (fuel consumption and pollution emissions) compared with
diesel bus, otherwise provides similar benefits.

Motorcycle
Relatively low purchase and fuel costs compared with average automobile.

Bicycle
Low costs compared with automobile travel. Does not require ability to drive and so
provides equity benefits. Provides physical exercise.

Walk
Low costs compared with automobile travel. Does not require ability to drive and so
provides equity benefits. Provides physical exercise.

Telework
Minimal external costs. Does not require ability to drive and so provides equity benefits..

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Table 7-1 summarizes the typical benefits of various modes. Automobile and motorcycle
travel tend to provide the greatest level of mobility, but provide few other benefits.
Rideshare and public transit reduce external costs (particularly under urban-peak
conditions) and provide affordability and mobility for non-drivers. Walking and cycling
minimize external costs, and provide affordability, mobility for non-drivers and physical
fitness. Telework reduces external costs and provides accessibility for non-drivers. Of
course, these benefits may vary depending on the particular situation.

Table 7-1 Benefits by Mode

Mode Relative Reduced Mobility for Physical
Mobility Affordability External Costs Non-Drivers Fitness
Average Automobile 3
Compact Car 3 1
Electric Car 3
Van or Light Truck 3
Rideshare Passenger 1 3 3 3
Diesel Bus 1 2 1 3
Electric Bus/Trolley 1 2 2 3
Taxi 1 1 3
Motorcycle 2 1 2
Bicycle 2 2 3 3 3
Walk 1 3 3 1 3
Telework 1 3 3
Rating from 1 (small benefit) to 3 (very beneficial).

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Information Resources
Information sources on transportation benefit evaluation techniques are described below.

Ulrich Blum, “Positive Externalities and the Public Provision of Transportation Infrastructure,”
Journal of Transportation Statistics, Vol. 1, No. 3, Oct. 1998, pp. 81-88.

Economic Development Research Group (www.edrgroup.com) provides extensive information

on economic evaluation methods.

Phil Goodwin and Stefan Persson, Assessing the Benefits of Transport, European Conference of
Ministers of Transport; OECD (www.oecd.org), 2001.

David Greene, Donald Jones and Mark Delucchi (eds.), The Full Costs and Benefits of
Transportation, Springer (Berlin), 1997.

Thomas Hogarty, “Social Benefits of Personal Vehicle Travel,” Transportation Quarterly, Vol.
52, No 2, Spring 1998, pp. 5-9.

Todd Litman, Economic Development Impacts of Transportation Demand Management,

presented at the Transportation Research Board Conference on Transportation And Economic
Development, 2002, available at Victoria Transport Policy Institute (www.vtpi.org).

Todd Litman and Felix Laube, Automobile Dependency and Economic Development, VTPI
(www.vtpi.org), 1999.

David Luskin, Facts and Furphies in Benefit-Cost Analysis: Transport, Report 100, Bureau of
Transport Economics (www.bte.gov.au/docs/index.htm), 1999.

SACTRA, Transport Investment, Transport Intensity and Economic Growth, Standing

Committee on Trunk Road Assessment, DETR
(www.roads.detr.gov.uk/roadnetwork/heta/sactra98.htm), 1997.

Value Pricing and Congestion Pricing Homepage (www.valuepricing.org), Hubert H. Humphrey

Institute of Public Affairs at the University of Minnesota.

Erik Verhoef, “External Effects and Social Costs of Road Transport,” Transportation Research,
Vol. 28A, No.4, 1994, pp. 273-287.

William Vickrey (edited by Richard Arnott, Anthony B. Atkinson, Kenneth Arrow, Jacques H.
Drèze), Public Economics; Selected Papers by William Vickrey, Cambridge University Press
(www.uk.cambridge.org), 1994.

Glen Weisbrod, Synthesis of Current Practice for Assessing Economic Development Impacts
from Transportation Projects, NCHRP Study 20-5 (www.edrgroup.com/pages/summary-
synthesis.html), TRB, National Academy Press, ISBN 0-309-06873-8, 2000.

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