Economic Analysis in Transportation Systems

Tapan K. Datta, Ph.D, P.E.

CE 7640: Fall 2002

Demand

Demand for highway transportationSame concept as demand for goods

and servicesWe pay a price to satisfy our travel

demand

1. Existing Traffic

2. Diverted Traffic

3. Generated Traffic

4. Growth or Decline

Components of Demand (Traffic Demand)

Traffic Demand1. Existing traffic traveling at a lower cost2. Traffic gets diverted to a new and

improved road3. New destinations are created due to new

or improved roads4. Natural growth or decline must be

accounted for in the estimation of demand

Unmet Demand

Demand Curve Relationship between

Vehicles per hour (vph) Cost of trip Time

Volume

Pri

ce

Cost of travel changes with age of facility

- since volume is a function of price/cost

As cost of travel reduces

-volume increases

-the curve shifts.

The cost of travel changes over: time of day, day of week, seasons and etc.

1 yr

.

6 yr

s.

11 y

rs.

16 y

rs.

21 y

rs.

26 y

rs.

31 y

rs.

Veh/hr

Pri

ce (

cost

) $

These show growth of traffic

= cost of travel, say at 6:00 pm

XX

Optimum Traffic Volume

D

D

Avg. Fixed Cost

Avg. Total Cost

Marginal CostDemand

Pri

ce/C

ost

Volume (VPH)V1 V V2

Optimal Volume

C1

C2

X2

X1

O

Marginal Cost is the rate of change of cost per unit increase in volume

If Traffic Volume = OV1

Cost/Trip = OX1

Marginal Cost = OC1

If price is slightly reduced, then volume increases

For price OX2 volume is OV2

Marginal Cost = OC2

Since OC2 is greater than OX2 The additional trips are not worth its cost

Optimum Traffic Volume

Nature of Costs

1. Cost of Highway

- Construction

- Maintenance

- Operation

2. Cost of Vehicle Operations

3. User’s Personal Costs

Fixed Costs Right-of-Way Development costs Planning and Design Construction costs Maintenance costs Administration costs Cost of Operation Loss of Property Tax

Variable Costs

Vehicle Costs Fuel Costs Maintenance Wear and Tear Insurance

Community Costs Loss of Amenity Air and Noise Pollution

Avg. Fixed Cost

Avg. Total Cost

Marginal CostP

rice

/Cos

t ($

)

Marginal Cost is the rate of change of cost per unit increase in volume

O Volume (VPH)

Avg. Variable Highway Costs

Chapter 2

Economics:

Social science that studies the production distribution and consumption of commodities

Economy:

Thrifty or economical use of material resources

• That phase of engineering which involves engineering works, equipment and processes to determine the relative amount of the net economic gains.

• Process of comparing engineering work using compound interest to arrive at a measure of profitability of the proposal.

Engineering Economy

Engineering Economy in Highways

Construction should be planned with an eye for the future

Roads should be built only to the extent and of such types as will pay themselves.

There must be enough traffic and type of improvement shall be such that the savings in cost of transportation is at least equal to the cost of improvement.

Basic Premise of EngineeringEconomy

Economy

1. Instinctive desire to save

- Save for future use

- Save for different use

2. Conservation of commodities

- Future use

3. Conservation of Labor

- Alternative use

4. Long range result of conservation of resources

- Growth with least amount of resources

5. Public versus Private

- Public viewpoint - Welfare of everyone

- Private viewpoint - Welfare of one

Basic Premise of Engineering(Continued)

Principles of Analysis

1. Complete Objectivity- Selection of Factors- Selection of Cost- Selection of Vest Charge

2. Economic analysis is not a management decision

3. “Hunch” has no place in economic analysis

4. Study all possible alternatives

5. Always consider the “Do Nothing” alternative

6. Separate market and non-market factors

- Factors of general socio-economic consequences are excluded from calculations

7. The analysis is a study of future conditions

- Careful forecasting is necessary

Principles of Analysis (contd…)

8. Past events and investments are irrelevant.9. Use same time periods for all factors10. Analysis period should not extend beyond

the period of reliable forecasts.11. Same time frame for all factors12. Differences in alternatives are controlling13. Common factors of equal magnitude may

be omitted

Principles of Analysis (contd…)

14. Use the net basis for all costs and consequences

15. Analysis for economy is independent of financing

16. Uncertainties need to be acknowledged

17. Separate decisions are made at separate levels of management

18. Viewpoints should be established before final decisions are made

Principles of Analysis (contd…)

19. Establish criteria for decision making

20. Consider all consequences to whomsoever they may accrue

21. Final decision should also consider market factors

Principles of Analysis (contd…)