Making your own Cost-Benefit Analysis

You are asked to make a national Cost-Benefit Analysis for a new road in the municipality of
Hazerloo. The civil servants of the municipality of Hazerloo provide you with the following
information:

Information:
• The construction costs of the new road will be 26 million euros. Assume that the development of the
road takes one year and the road will be used directly after opening (in year 2);
• It is estimated that in total 550.000 trips per year which are already made in the reference case (no
new road) experience travel time savings as a result of the new road (on average 10 minutes per trip).
Moreover, as a result of the new road 50.000 additional trips will be made
• The Value of Travel Time Savings = 9.25 euro per hour;
• The road will improve the liveability in Hazerloo. 1,800 households will experience a reduction in noise
pollution. On average these households are willing to pay 35 euro per year for this reduction;
• Moreover, civil servants of Hazerloo assessed the liveability effects of the new road by analysing the
impact of the reduction of the four core negative liveability effects (noise pollution, air pollution, smell
and vibration) on real estate prices. Based on solid research the civil servants estimated that the real
estate prices of the 1,800 households will increase with 2,500 euro per house (on average);
• Based on the same research civil servants calculated that, on average, the prices of the 1,800 houses
will increase one year after opening of the road. Note that this is an average: for some houses it holds
true that the prices will already rise before the road opens and for some houses the price will increase
only after a few years;
• There is evidence that the new road will increase traffic safety in Hazerloo. It is expected that the
number of traffic deaths in Hazerloo will decrease with two deaths every 10 years.
• The Value of a Statistical Life is 2,600,000 per life;
• Some real estate owners anticipate that the improved safety, subsequently, improves the
attractiveness of renting a house in Hazerloo. Hence, they raise the rents of 100 houses with 40 euro
per month;
• The new road also affects turnover and profits of shops and stores located at the Dorpsstraat in
Hazerloo, since traffic will use the new road instead of the Dorpsstraat. Turnover drops with 80,000
euro per year and the total profit of shops and stores located at the Dorpsstraat drops with 20,000
euros per year. Contrastingly, the new road is beneficial for the entrepreneurs in the nearby city of
Akersloot. Turnover in Akersloot will increase with 60,000 euros per year and profits with 20,000
euros per year;
• A key downside of the new road is that it crosses a very specific landscape and a pristine forest which
leads to two negative welfare effects being:
o Apart from the shop owners/entrepreneurs located in the Dorpsstraat, the profit of the
restaurant located in the forest is negatively affected by the new road. Profits will drop with
30,000 euros per year. An academic studied the welfare losses resulting from the reduction in
recreational opportunities experienced by the citizens of Hazerloo. The result of this study
was that citizens experience a welfare loss of 50,000 euros per year, despite the fact that they
saved money which they would have spent in the restaurant in the state of affairs without
the road;
o Apart from the fact that citizens of Hazerloo experience welfare losses as a result of a
reduction in recreational opportunities, they also experience a welfare loss from the
reduction of the ecological quality of the forest and the intrusion of the beautiful landscape.
However, it was not possible to transfer this welfare loss in monetary terms.
• The prescribed discount rate is 4,5%.
• The time horizon of the effects accruing from the road project is 50 years.