HIGHWAY ECONOMY

HIGHWAY ECONOMY

INTRODUCTION:

            Governments have, of necessity, provided certain facilities that the private sector could not furnish. Among them are highways and public transportation. The intents of the expenditure for highways are to raise the level of the entire economy by providing for ready transportation of goods; to assist in problems of national defense; to make easier the provision of community services such as police and fire protection, medical care, schooling, and delivery of the mails; and to open added opportunities for recreation and travel. Highways benefit the landowner because ready access makes his property more valuable. Their improvement benefits the motor-vehicle user through reduced cost of vehicle operation, savings in time, reduction in accidents, and increased comfort and ease of driving. On the other hand, road improvements consume resources, including land, which might be used for other productive purposes by individuals or by government and the vehicles travelling produce air pollution and noise. From the point of  view of resources use, then, highways can be justified only if, in net sum, the consequences are favorable-that is, if cost reductions to highway users and other beneficiaries of the improvement exceed the costs, including some allowance for the return on the money invested. There are as has been indicated before, numerous other factors to be considered, but this chapter focuses on the economic or resource-use phases.

            Highway economy was under discussion over a century ago. W.M Gillespie, professor of civil engineering at Union College, in his Manual of the Principles and Practice of Road Marking, stated that “A minimum of expenses is of course highly desirable; but the road which is truly the cheapest is not the one which has cost the least money, but the one which makes the most profitable returns in proportion to the amount expended upon it.”

            The first detailed attention to highway economy developed about 40 years ago at lowa State College. It focused largely on the relative economy of various roads surfacing and, later, on the costs of motor-vehicle operation. The advent of the state wide planning surveys with the masses of data developed by them brought attention to many other factors of importance to the overall problem. Even so, attention to highway economy as a topic for detailed research and analysis has been small and sporadic. An accepting was that economic comparisons of alternative routes on the Interstate System were required by federal regulations. Many of these were based on the so-called Red-Book, developed by the AASHO Committee on the Highway Design. Further impetus for economic analysis on federal-aid projects many come through the Federal-Aid Highway Act of 1970 (Sect. 186) which required that in 1972 the Federal Highway Administration.

           

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.

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.