Research 350 - NZ Transport Agency

2. APPROACHES TO ASSESSING NATIONAL ECONOMIC BENEFITS
Responses
Arguments against the claim for additional benefits due to the assumption of perfect
competition can be summarised as follows:
• Assumptions of imperfect competition would also impact on factors such as discount
rate assumptions. SCBA often employs private discount rates as the basis for project
discount rates. Under conditions of prefect competition these will equate to social
discount rates. However imperfect competition will drive a wedge between private and
social discount rates. It is quite conceivable that imperfect competition will result in
social discount rates being higher than private ones, precisely because imperfect
competition exists.
For example, a telecommunications investment (displaced by a transport investment)
may well extend the market reach of companies and enhance competition. Private
returns to the telecoms investment may then be lower then social ones. Thus the
discount rate will be underestimated by SCBA. It is also conceivable (though perhaps
less likely) that imperfect competition will result in private discount rates exceeding
social ones (BTE 1999, pp. 95-98).
• In short, assuming imperfect competition opens up a new area of considerable
indeterminacy. BTE conclude that ‘the overall direction of the errors whether favouring
or opposing the investment is generally ambiguous’ (BTE 1999, p. 100).
• SACTRA echo a similar theme in considering the impacts of external costs, perfect
competition and imperfect competition on SCBA. For example, in some circumstances
the assumption of perfect competition might result in a SCBA which overestimates
benefits (SACTRA 1999, Table 4.2).
• As indicated above, after over 20 years of reform levels of competition in many sectors
of the New Zealand and Australian economies is already fairly intense. Thus the
divergence from perfect competition, and the scope for further increasing competition
through improvements to transport infrastructure, may be limited. (BTE 1999, pp. 23,
92, 96, 126).
• SACTRA used a range of past theoretical reasoning and empirical work to conclude
that, under a given set of assumptions, allowing for imperfect competition might add
6% to total economic benefits estimated by SCBA (SACTRA 1999, para. 4.70). In
SACTRA’s words ‘typically, although the assumptions of perfect competition in [the]
non-transport using sector introduces errors, they may be quite small relative to those
involved in estimating conventional transport benefits’ (SACTRA 1999, para. 4.75).
• BTE reach a similar conclusion, noting that ‘the loss of realism in assuming perfect
competition may be worth the enormous saving in analytical effort’ (BTE 1999, p. 101).
• The work of Preston and Holvad (2005) draws heavily on material already utilized by to
SACTRA in 1999, particularly the studies of Newbery, Davies and Venables and
Gasiorek. While some more recent studies are also considered, it is therefore
somewhat unclear as to why the conclusions are reached by these authors vary so
greatly from those of SACTRA.
• No formal reasoning is given for the selection of an average ‘omitted benefits’
multiplier of 1.4. However, mathematical reconstruction indicates that this is the
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