6: Basic Concepts

Question 1

Rationale for policy

Answer 1

Free markets fail to achieve an efficient allocation of resources: market failures –> externalities (e.g. congestion, pollution, noise, emissions, accidents and social exclusion)

Question 2

Externality

Answer 2

Unconsidered cost/benefit experienced by a third party due to an economic decision made by others
Requirement: lack of suitable pricing of the effect

Question 3

Transport is a …

Answer 3

Derived demand: demand occurs as result of demand from another sector, users to not get any benefit directly from transport, but allows them to access other services/goods

Question 4

Generalized transportation costs (GTC)

Answer 4

Cost of mobility for the individual: monetary costs (e.g. gas, depreciation, insurance) and non-monetary costs (time, (dis)comfort, safety, availability of info)

Question 5

Cost Benefit Analysis (CBA)

Answer 5

Investment should only be made if the benefits outweigh the costs (positive NPV)

Question 6

Main problems with CBA

Answer 6

1. Lack of direct markets in which to value particular costs and benefits in monetary terms (considering non-economic variables is difficult)
2. Distributional problems of valuing benefits and costs to people whose circumstances are different

Question 7

Possible risks

Answer 7

Policy risk (legislative risk)
Risk on delivering the asset (construction risk, planning risk, residual value risk)
Risk on operating the asset (operational risk, inflation risk, maintenance risk)
Risk of demand and revenue (design risk, availability risk, volume risk, technology risk)

Question 8

Cost of building project

Answer 8

Project design decisions
Legal requirements
Community and political environment
Site characteristics
Project execution
General and local market conditions

Question 9

Estimated costs vs real costs (unreliable CBA)

Answer 9

Real costs often a lot higher than initial estimation, leads to wrong projects realized and misallocation of resources
Cost underestimation cannot be explained by error and seems to be due to strategic misrepresentation (lying)

Question 10

Bias and CBA, why?

Answer 10

Benefits are overestimated and costs are often underestimated, because:
Technological reasons
Psychological reasons
Political-economic reasons