A Framework for Highway Economy Studies

A Framework for Highway Economy Studies:

            Possibly the most difficult and error-prone phase of economy studies lies in placing the study in the proper framework or perspective. And if this phase is done incorrectly, inputs of the most reliable data and flawless procedures for analysis will still give erroneous results. Some of the guidelines to be followed in developing this framework are:

1.      Economy studies are concentrated with forecasting the future consequences of possible investments of resources. Past happenings, unless they affect the future, are not considered. This “forward” look is distinctly different from the “backward” look of accounting practice. This difference is illustrated by the discussion of incremental and sunk costs later in this chapter.

2.      Each alternative among which choices are to be made must be fully and clearly spelled out. As an example, if a freeway is proposed to parallel a busy street, there will be vehicle operating cost savings not only to those diverted to the freeway but, possibly, also to the remaining travelers on the street. On the other hand, traffic using this same freeway could increase congestion and vehicle operating costs on other traffic arteries. This likewise should be recognized. Thus, the first step in analysis is to make a complete list of consequences, both economic and other.

3.      A clear distinction must be made between economic analysis (the use of resources) and financial considerations (the use of money). It has already been indicated in Chapt. 03 that decision making involve dealing with three elements in sequence. These are (a) economic, which is the use of resources; (b) financial, which deals with getting and expending money and, (c) political and administrative, a catchall phrase for all the no quantifiable forces that bear on the decision. It was also indicated that rational decisions were more likely to be reached if the best alternative from an economic point of view were tested in sequence for its financial and political and administrative viability. It this alternative failed either of these two tests the next most viable alternative would then be examined, and so on.  In the past analysts sometimes erroneously have included financial considerations in economy studies. A first illustration is the practice of including interest as a cost only if money is to be borrowed to finance a project. But it can be seen that, regardless of the source of funds, the same resources will be consumed in constructing, maintaining, and operating the proposed highway whether the project is financed with borrowed funds or with current revenues. Two more among the common situations where financial thinking can lead to errors in economy studies involve allocated and sunk costs.