Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

HOW TO CALCULATE ECONOMIC BENEFITS BY QUANTIFICATION OF THE CONSUMER’S SURPLUSUser benefits for transport projects can be defined by the concept of the consumer’s surplus. Consumer’s surplus is defined asthe excess of consumers’ willingness-to-pay over the prevailing generalised cost of a specific trip. Willingness-to-pay is themaximum amount of money that a consumer would be willing to pay to make a particular trip; generalised cost is an amount ofmoney representing the overall disutility (or inconvenience) of travelling between a particular origin (i) and destination (j) by aparticular mode. It can be expressed by the following:gc = p+z+vτwhere:p is the amount paid for the trip by the user (tariff, toll)z is the perceived operating costs for road vehicles (for public transport is equal to zero)τ is the total time for the tripv in the unit value of travel time.Total consumer’s surplus (CS 0 ) for a particular i and j in the business as usual scenario is shown diagrammatically in the firstfigure. It is represented by the area beneath the demand curve and above the equilibrium generalised cost, area CS 0 .User benefit ij = Consumer’s surplus ij1- Consumer’s surplus ij0Where 1 is the do-something scenario and 0 is the BAU scenario.Supply, S ij 0Supply, S ij 0GC 0 CS 0Demand, Dij=f(GCij)GC 0GC 1Benefit =Δ CSSupply, S ij 1Demand, D ij =f(GC ij)0T 0Trips, Tij0T 0T1Trips, T ijIf there is an improvement in supply conditions (for example an improvement in road infrastructure) the consumer’s surpluswill increase by an amount of ΔCS, due to a reduction in equilibrium generalised cost.Usually we do not know the real shape of the demand curve; we know the GC and T in the BAU scenario and a forecast for theGC and T in the do-something scenario. The demand curve is only supposed to be a straight line as shown in the figure, even itis not the case in reality. The user benefit can be approximated by the following function, known as the rule of a half 11 :GC01ΔCS= ∫ D GC)dGC ≈ Rule of one Half ( RoH)= ( GC2− GC1)(T+ T( 00 1GC1When the effect of a project can be captured in the form of a reduction in generalised costs between particular origins anddestinations, the rule of a half is a useful approximation of true user benefits.It is advisable to use the rule of a half to calculate user benefits in most cases.)DIVERTED TRAFFIC WELFARE CHANGESThe benefits of traffic diverted in the two case studies (Chapter 4) were measured according to the following criteria:- when the diversion was between different routes but within the same transport modes, as in the motorway case study, thebenefits were estimated on the basis of the changes in total users costs, and the new and the existing links were considered asperfect substitutes;- when the diversion was between different modes, as in the railway case studies, the benefits were estimated on the basis ofthe change in surplus of the two markets, road and rail. It is important to note that the relevant prior generalised cost againstwhich the change in travel costs was assessed, were those for the mode to which users have switched, not the costsassociated with the mode used in the BAU scenario. In the case of a totally new infrastructure the measurement of thebenefits depends on the nature of the new mode, its placement in the mode hierarchy and transport network and should bederived from the users’ willingness-to-pay.11 0 1( CG −CG)× 010 1 T − TT + ( 0⎛ 10 1 TCG −CG)× = CG −CG2( ) T 0 −T0 ⎞⎛⎜⎜+ ⎟⎝ 2 ⎠⎟ = 0 1( CG −CG)⎝⎜12T 0 + T −T02⎞⎛ 0⎠⎟ = 0 1 T + T( CG −CG)1 ⎞⎜ ⎟⎜⎝ 2 ⎠⎟77