by David Levinson

The procedures developed in this study are intended to help Caltrans decide whether it should deploy particular elements of its intelligent transportation infrastructure. The benefit cost analysis method is the same for ITS as for any other project or facility, even if the sources of data differ (and are more uncertain). However, even with the well developed Benefit Cost method a number of issues are must be resolved, including the determination of relevant cash flows, choosing the appropriate discount rate, the data assumptions, and selecting the evaluation criteria, which are dealt with in turn. This section summarizes standard Benefit-Cost analysis procedures and applies them with a thorough example.

The identification of the costs, and more particularly the benefits, is the chief component of the "art" of Benefit-Cost Analysis. This component of the analysis is different for every project. Furthermore, care should be taken to avoid double-counting, especially counting cost savings in both the cost and the benefit columns. However, a number of benefits and costs should be included at a minimum. In transportation these costs should be separated for users, transportation agencies, and the public at large.

User benefits from transportation are best derived from the sum of consumer’s surplus for all consumers, where the consumer’s surplus for an individual is the difference between what she would pay and what she actually must pay in order to travel. This is measured for both time and money costs. A key element of this analysis is the change in the number of consumers as money or time prices drop (for instance from P₀ to P₁ as illustrated in Figure 1), that is the lower the cost of travel, the more trips which will be made (the number of trips increases from Q₀ to Q₁). The magnitude of the number of additional trips depends on the sensitivity or elasticity of demand to changes in price and the actual shift in the price. A minor change, which saves mere seconds on a 30 minute trips is likely to induce few new trips, while a new highway which saves 10 minutes will induce many more.

The change in benefits for existing users is given by the rectangle defined by P₀P₁EA (the total price change (P₀ - P₁) multiplied the number of old users (Q₀) receiving the price change)

The benefits for new users is given by the triangle A E B (the number of new users (Q₁ - Q₀) multiplied by the difference between what the average new user would pay and what that new user has to pay at the new price (0.5 * (P₀ - P₁))).

One element of the change in consumer’s surplus is movement along the demand curve, the second element is a shift of the demand curve. An improved quality of a trip will lead individuals to pay more (in money or time) for that trip. This quality shift can be achieved through real savings in the quality of trip (it is faster for instance) or in certainty about the trip (I am sure it will take 20 minutes, rather than have some probability that it will take 40 minutes).

Figure 2 illustrates a change in the quality of the trip which results in no change in money price users pay. Again, there are two groups for which benefits must be measured, the old users and the new users. Here the demand curve shifts from D_B to D_A.

The change in benefits to old users is defined by the area ZXVY. This benefit comes because old users would be willing to pay more money to receive a higher quality of service (I would pay more dollars to travel at Level of Service A (spend 25 minutes on the road) than at Level of Service B (spend 30 minutes on the road), all else equal). In practice this is extremely hard to measure because it requires knowledge of the shape of the demand curves at all price levels, while generally the demand curve is really only understood in the area around the actual price (P₀).

The change in benefits to new uers is defined by the triangle VYW.

If the price level increases, the benefit increase will be smaller. If price increases to P₁, then the net benefit will be zero and there will be no new users. The difference between P₁ and P₀ is the value of the additional quality of service.

Agency’s benefits come from profits. But since most agencies are non-profit, they receive no direct profits. Agency construction, operating, maintenance, or demolition costs may be reduced (or increased) by a new project, these cost savings (or increases) can either be considered in the cost column, or the benefit column, BUT NOT BOTH.

Society is impacted by transportation project by an increase or reduction of negative and positive externalities. Negative externalities, or social costs, include air and noise pollution and accidents. Accidents can be considered either a social cost or a private cost, or divided into two parts, but cannot be considered in total in both columns.

Under the presence of positive network becomes more valuable the more users (destinations) that it has. An example is the road network, in isolation, a road between two users (a, b) has some value (V) (say 2: ab, ba). but add a third destination to the network (c), the value increases to six: (ab, ba, ac, ca, bc, cb), add a fourth destination (d) and now 12 different connections can be made. The equation more precisely is:

where: N is the number of users

If there are network externalities, then consumers’ surplus for each different demand level should be computed. Of course this is easier said than done. Generally, positive network externalities are ignored in Benefit Cost Analysis.

Both the costs and benefits flowing from an investment are spread over time. While some costs are one-time and borne up front, other benefits or operating costs may be paid at some point in the future, and still others received as a stream of payments collected over a long period of time. Because of inflation, risk, and uncertainty, a dollar received now is worth more than a dollar received at some time in the future. Similarly, a dollar spent today is more onerous than a dollar spent tomorrow. This reflects the concept of time preference which we observe when people pay bills later rather than sooner. The existence of real interest rates reflects this time preference. The appropriate discount rate depends on what other opportunities are available for the capital. If simply putting the money in a bank earned 10%, then at a minimum, no investment earning less than 10% would be worthwhile. In general, projects are undertaken with those with the highest rate of return first, and then so on until the cost of raising capital exceeds the benefit from using that capital. No project should be undertaken on cost-benefit grounds if another feasible project is sitting there with a higher rate of return.

Three alternative bases for the setting the government’s test discount rate have been proposed:

• The social rate of time preference recognizes that a dollar's consumption today will be more valued than a dollar's consumption at some future time for, in the latter case, the dollar will be subtracted from a higher income level. The amount of this difference per dollar over a year gives the annual rate. By this method, a project should not be undertaken unless its rate of return exceeds the social rate of time preference.
• The opportunity cost of capital basis uses the rate of return of private sector investment, a government project should not be undertaken if it earns less than a private sector investment. This is generally higher than social time preference.
• The cost of funds basis uses the cost of government borrowing, which for various reasons related to government insurance and its ability to print money to back bonds, may not equal exactly the opportunity cost of capital.

Typical estimates of social time preference rates are around 2 to 4% while estimates of the social opportunity costs are around 7 to 10%.

Generally, for Benefit-Cost studies an acceptable rate of return (the government’s test rate) will be already have been established. An alternative is to compute the analysis over a range of interest rates, to see to what extent the analysis is sensitive to variations in this factor. In the absence of knowing what this rate is, we can compute the rate of return (internal rate of return) for which the project breaks even, where the net present value is zero. Projects with high internal rates of return are preferred to those with low rates.

The basic math underlying the idea of determining a present value is explained using a simple compound interest rate problem as the starting point. Suppose the sum of $100 is invested at 7 per cent for 2 years. At the end of the first year the initial $100 will have earned $7 interest and the augmented sum ($107) will earn a further 7 per cent (or $7.49) in the second year. Thus at the end of 2 years the $100 invested now will be worth $114.49.

The discounting problem is simply the converse of this compound interest problem. Thus, $114.49 receivable in 2 years time, and discounted by 7 per cent, has a present value of $100.

Present values can be calculated by the following equation:

(1)

where: F = future money sum

P = present value

i = discount rate per time period (i.e. years) in decimal form (e.g. 0.07)

n = number of time periods before the sum is received (or cost paid, e.g. 2 years)

Illustrating our example with equations we have:

The present value, in year 0, of a stream of equal annual payments of $A starting year 1, is given by the reciprocal of the equivalent annual cost. That is, by:

(2)

where: A = Annual Payment

For example: 12 annual payments of $500, starting in year 1, have a present value at the middle of year 0 when discounted at 7% of: $3971

The present value, in year 0, of m annual payments of $A, starting in year n + 1, can be calculated by combining discount factors for a payment in year n and the factor for the present value of m annual payments.

For example: 12 annual mid-year payments of $250 in years 5 to 16 have a present value in year 4 of $1986 when discounted at 7%. Therefore in year 0, 4 years earlier, they have a present value of $1515.

Three equivalent conditions can tell us if a project is worthwhile

1. The discounted present value of the benefits exceeds the discounted present value of the costs
1. The present value of the net benefit must be positive.
1. The ratio of the present value of the benefits to the present value of the costs must be greater than one.

However, that is not the entire story. More than one project may have a positive net benefit. From the set of mutually exclusive projects, the one selected should have the highest net present value. We might note that if there are insufficient funds to carry out all mutually exclusive projects with a positive net present value, then the discount used in computing present values does not reflect the true cost of capital, rather it is too low.

There are problems with using the internal rate of return or the benefit/cost ratio methods for project selection, though they provide useful information. The ratio of benefits to costs depends on how particular items (for instance, cost savings) are ascibed to either the benefit or cost column. While this does not affect net present value, it will change the ratio of benefits to costs (though it cannot move a project from a ratio of greater than one to less than one).

This problem, borrowed from Watkins (1996), illustrates how a Benefit Cost Analysis might be applied to a project. Consider a highway improvement such as the extension of Highway 101 into San Jose. The improvement of the highway would lead to more capacity which saves travel time and increases safety. But there will almost certainly be more total traffic than was carried by the old highway. This example excludes external costs and benefits, though their addition is a straight-forward extension.

The following is a highly abbreviated analysis using hypothetical data, given in Table 1. The data for the "No Extension" can be collected from off-the-shelf sources, however the "101 Extension" column’s data requires the use of forecasting and modeling.

Table 1: Data

The data indicate that the time cost of a rush hour trip is $5 without the project and $3 with it. The time cost of a nonrush trip is $2.80 without the project and $2 with it. For the rush-hour trip the project saves $2 and for the nonrush-hour trip it saves $0.80.

There is an increase in consumer surplus both for the trips which would have been taken without the project and for the trips which are stimulated by the project (so-called "induced demand"), as illustrated above in Figure 1. Our analysis is divided into Old and New Trips, the benefits are given in Table 2.

Table 2: Hourly Benefits

To convert the benefits to an annual basis one multiplies the hourly benefits of each type of trip times the number of hours per year for that type of trip. There are 260 week days per year and at six rush hours per weekday there are 1560 rush hours per year. This leaves 7200 nonrush hours per year. With these figures the annual benefits are given by Table 3:

Table 3: Annual Benefits

The safety benefits of the project are the product of the number of lives saved multiplied by the value of life. In a more complete analysis, we would need to include safety benefits from non-fatal accidents.

The value of life may be computed by examining how individuals reveal their preferences for known risks. For instance, some occupations are riskier than others. Suppose people accept an increase in the risk of death of 0.1% per year in return for $400 higher income per year. Then we can assume that a project that reduces the risk of death in a year by 0.1% gives a benefit to each person affected by it of $400 per year. The implicit valuation of a life in this case is $400,000. Thus, the benefit of the reduced risk project is the expected number of lives saved times the implicit value of a life. For the highway project this is 6 * $400,000 = $2,400,000 annually.

It should be noted that there is a wide range for the observed "Value of Life" from different studies, typical values are between $2 and $5 Million.

The annual benefits of the project are given in Table 4

Table 4: Total Annual Benefits

We assume that this level of benefits continues at a constant rate over a thirty-year lifetime of the project.

In our abbreviated example, the cost of the highway consists of right-of-way, construction, and maintenance. The cost of the right-of-way is the cost of the land and any structures upon it which must be purchased before the construction of the highway can begin. For purposes of this example the cost of right-of-way is taken to be $100 million and it must be paid before any construction can begin. In principle, part of the right-of- way cost for a highway can be recovered at the end of the lifetime of the highway if it is not rebuilt in place (for instance, a new parallel route is constructed and the old highway can be sold for development). For this example it is assumed that all of the right-of-way cost is recoverable at the end of the thirty-year lifetime of the project. The construction cost is $200 million spread evenly over a four-year period. Maintenance cost is $1 million per year once the highway is completed.

The schedule of benefits and costs for the project is given in Table 5

Table 5: Schedule Of Benefits And Costs

The benefits and costs are in constant value dollars; i.e., there was no price increase included in the analysis. Therefore the discount rate used must be the real interest rate. If the interest rate on long term bonds is 8 percent and the rate of inflation is 6 percent then the real rate of interest is 2 percent. Present value of the streams of benefits and costs discounted at a 2 percent back to time zero are given in Table 6, and were developed by applying the following equations.

To compute the Present Value of Benefits in Year 5, we apply equation (2) from above.

To convert that Year 5 value to a year 1 value, we apply equation (1)

The present value of right-of-way costs is computed as today’s right of way cost ($100 M) minus the present value of the recovery of those costs in year 30, computed with equation (1):

The present value of the construction costs is computed as the stream of $50M outlays over four years is computed with equation (2):

Maintenance Costs are similar to benefits, in that they fall in the same time periods. They are computed the same way, as follows:

To compute the Present Value of Maintenance Costs in Year 5, we apply equation (2) from above.

To convert that Year 5 value to a year 1 value, we apply equation (1)

Table 6: Present Value of Benefits and Costs

The positive net present value of $50.35 million and benefit/cost ratio of 1.2 indicate that the project is worthwhile if the interest or discount rate (cost of capital) is 2 percent. When we have a discount rate of 3 percent, the benefit/cost ratio is slightly under 1.0. This means that the internal rate of return is just under 3 percent. When the cost of capital is 3 percent the project is not worthwhile.

It should be noted that the market value of the right-of-way may understate the opportunity cost of having the land devoted to the highway. The land has a value of $100 million because of its income after property taxes. The economy is paying more for its alternate use but some of the payment is diverted for taxes. The discounted presented value of the payments for the alternate use might be more like $150 million instead of $100 million. Another way of making this point is that one of the costs of the highway is that the local governments lose the property tax on the land used.

Lesser , Jonathan and Zerbe Jr., Richard O. (1996) A Practitioner's Guide To Benefit-Cost Analysis

Watkins, Thayer (1996?) Cost Benefit Analysis San Jose State University Economics Department

Filipovitch, A.J. (1996) Benefit/Cost Analysis

Thuessen, G. J. and Fabrycky, W.J. (1984) Engineering Economy 6th edition Prentice Hall Englewood Cliffs NG

Glossary for Benefits and Costs of Intelligent Transportation Systems

compiled by David Levinson

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Accessibility: The number of destinations which can be reached, weighted by the ease with which those destinations can be reached. Contrast with mobility.

Accident: An unstable situation which includes at least one harmful event.

ADVANCE (Advanced Driver and Vehicle Advisory Navigation Concept): A cooperative effort to evaluate the performance of the first large scale dynamic route guidance system in the U.S.

Advanced Transportation Systems (ATS): A collection of technologies linking information systems with transportation to improve the efficiency and safety of transportation systems, see Intelligent Transportation Systems

Affordability: Assessment of risk that is a function of cost, priority, and availability of fiscal and manpower resources.

APTS (Advanced Public Transportation Systems): One of six user services areas defined by the original ITS National Program Plan. (Recent updates to the plan have reorganized the user services into different categories).

Asset: Anything owned or having monetary value. Usually refers to equipment, a part or a component to be repaired.

ATIS (Advanced Traveler Information Systems): Information systems designed to provide roadway users with accurate and timely information on travel conditions.

AVC (Automatic Vehicle Classification): Classifies trucks by vehicle length, number of axles, and axle spacing.

Average Annual Daily Traffic (AADT): The mean traffic on a road segment (in vehicles per day).

Average Costs: the total costs divided by the total output

Average Fixed Costs: the total fixed costs divided by the total output

Average Productivity: total quantity divided by the total quantity of input

Average Variable Costs: the total variable costs divided by the total output

AVI (Automatic Vehicle Identification): Identifies vehicles using light, microwave, or radio frequencies. Combines roadside receivers with on-board transponders to automatically identify vehicles. This includes license plate readers.

AVL (Automatic Vehicle Location): Calculates the location of a truck or trailer. There are several types of AVL Dead Reckoning AVL and Radio determination AVL.

Capital: The existing stock of productive resources, such as machines and buildings, that have been produced.

Capital Market: the market in which savings are made available to investors

Change in Demand: A shift in the entire demand curve so that at any given price, people will want to buy a different amount. A change in demand is caused by some change other than a change in the goods price.

Change in Quantity Demanded: Movement up or down a given demand curve caused by a change in the goods price with no shift in the curve itself.

Change in Quantity Supplied: A price change causing movement along the supply curve but no shift in the position of the curve itself.

Change in Supply: A change in one of the cost determinants of supply causing a shift in the position of the supply curve.

Choice: The act of selecting among alternatives.

Coase's Theorem: the assertion that if property rights are properly defined, then people will be forced to pay for any negative externalities they impose on others, and market transactions will produced efficient outcomes

Complement: a good for which demand decreases when the price of a closely related good increases

Consumer Sovereignty: the principle that holds that each individual is the best judge of what makes him better off

Consumer[‘s] Surplus: the difference between what a person would be willing to pay and what he actually has to pay to buy a certain amount of a good

Consumers’ Surplus: the difference between what a person would be willing to pay and what he actually has to pay to buy a certain amount of a good for all consumers, also the area under the demand curve and above the price line. Contrast with Producer’s Surplus or Profit.

Consumption Function: the relationship between disposable income and consumption

Constant Returns To Scale: when all inputs are increased by a certain proportion, output increases by the same proportion

Correlation: relationship that results when a change in one variable is consistently associated with a change in another one

Cost Benefit Analysis (CBA): A technique for assessing the range of costs and benefits associated with a given option, usually to determine feasibility.

Cost Effectiveness Analysis (CEA): A technique for assessing the range of costs to accomplish a specific goal, that is with benefits held fixed.

Cross Subsidization: the practice of charging higher prices to one group of consumers in order to subsidize lower prices for another group

CVO (Commercial Vehicle Operations): Includes all the operations associated with moving goods and passengers via commercial vehicles over the North American highway system and the activities necessary to regulate these operations.

Debt: capital, such as bonds and bank loans, supplied to a firm by lenders; the firm promises to repay the amount borrowed with interest

Decision Tree: a device for structured decision making that spells out the choices and possible consequences of alternative actions

Demand Curve: the relationship between quantity demanded of a good and the price, whether for an individual or for the market (all individuals) as a whole

Deregulation: the lifting of government regulations to allow the market to function more freely

Diminishing Marginal Utility: the principle that says that as an individual consumes more and more of a good, each successive unit increases her utility, or enjoyment, less and less

Diminishing Relative Value: The principle that if all other factors remain constant, and individuals relative value of a good will decline as more of that good is obtained. Accordingly, the relative value of a good will increase, other factors remaining constant, as an individual gives up more of that good.

Diminishing Returns To Scale: when all inputs are increased by a certain proportion, output increases by a similar proportion

Diminishing Returns: the principle that says as one input increases, with other inputs fixed, the resulting increase in output tends to be smaller and smaller

Discount Factor: The proportion of next year’s nominal value that you would pay to receive it today. Discount Factor = 1 - Discount Rate

Discount Rate: The premise behind any discount rate is the time value of money. One dollar today is not equal to one dollar a year from now. This must be considered in any evaluation of proposals with different time frames. The interest rate charged to banks when they wish to borrow from the central bank

Economics: The study of choice and decision-making in a world with limited resources.

Economic Rents: payments made to a factor that are in excess of what is required to elicit the supply of that factor

Economies Of Scale: what exists when it is less expensive to produce two items of the same good together than it would be to produce each one separately. Related to, but different than, Increasing Returns to Scale

Economies Of Scope: what exists when it is less expensive to produce two products together than it would be to produce each one separately

Efficiency: The allocation of goods to their uses of highest relative value.

Elasticity of Demand: The percentage change in the quantity demanded divided by the percentage change in price.

Equilibrium: The amount of output supplied equals the amount demanded. At equilibrium, the market has neither a tendency to rise nor fall but clears at the existing price.

ETC (Electronic Toll Collection): The process that allows a driver to pay tolls electronically.

ETTM (Electronic Toll and Traffic Management): The use of AVI to electronically collect tolls, enabling vehicles to pay tolls without stopping at toll booths.

Excess Demand: the result of the quantity demanded at a given price exceeding the quantity supplied

Excess Supply: the result of the quantity supplied at a given price exceeding the quantity demanded

Exchange: The voluntary transfer of rights to use goods.

Exchange Value: The purchasing power of a unit of currency for goods and services in the marketplace.

Exclusion Principle: The owner of a private good may exclude others from use unless they pay.

Expected Return: the average return--a single number that combines the various possible returns per dollar invested with the chances that each of these returns will actually be paid

Externality: a situation in which an individual or firm takes an action but does not bear all the costs (negative externality) or receive all the benefits(positive externality). Thus costs or benefits that fall on third parties.

Factor Demand: the amount of an input demanded by a firm, given the price of the input and the quantity of output being produced; an input will be demanded up to the point where the value of the input's marginal product equals the price of the input

Fixed, Or Overhead, Inputs: inputs that do not change depending on the quantity of output, at least over the short term

Fixed Costs: the costs resulting from fixed inputs, sometimes called overhead costs

Free Good: A good which is abundant and costless.

Free Rider: One who receives something without paying.

Good: Anything that anyone wants. All options or alternatives are goods. Goods can be tangible or intangible.

High Occupancy/Toll (HOT) Lanes: Lanes which are free to HOVs and permit SOVs to use them at a toll.

High Occupancy Vehicles (HOV): Vehicles with 2 or more (or 3 more) passengers, including the driver. Often special lanes are designated for HOVs.

Horizontal Equity: the principle that says that those who are in identical or similar circumstances should pay identical or similar amounts in taxes

Human Capital: the stock of accumulated skills and experience that make workers more productive

Imperfect Competition: any market structure in which there is some competition but firms face downward-sloping demand curves

Income Elasticity Of Demand: the percentage change in quantity demanded of a good as a result of a 1% change in income (the percentage change in quantity demanded divided by the percentage change in income)

Incomplete Markets: situations in which no market may exist for some good or for some risk, or in which some individuals cannot borrow for some purposes

Increasing Returns To Scale: when all inputs are increased by a certain proportion, output increases by a greater proportion

Inelastic Demand: A term used when the percentage change in quantity demanded is smaller than the percentage change in price.

Inferior Good: a good the consumption of which falls as income rises

Infinite Elasticity Of Demand: the situation that exists when any amount will be demanded at a particular price, but nothing will be demanded if the price rises even a small amount

Infinite Elasticity of Supply: situation that exists when any amount will be supplied at a particular price, but nothing will be supplied if the price falls even a small amount

Inflation Rate: the percentage increase in the general level of prices

Infrastructure: the physical facilities (e.g. roads, ports, bridges), and legal system that provide the necessary basis for a working economy

Intangible Benefits: Recurring or Non-recurring Benefits associated with information resource management issues. Examples of intangible benefits include: the effects of an improved service to the public, greater timeliness, improved accuracy, better control and security, productivity savings.

Intangible Costs: Recurring or Non-recurring Benefits costs which cannot be easily quantified, such as the Learning Curve, which includes the efficiency loss while personnel are learning to use a new information system may be an intangible cost.

Intelligent Transportation Systems (ITS): A collection of technologies linking information systems with transportation to improve the efficiency and safety of transportation systems

Interest: the return a saver receives in addition to the original amount she deposited, and the amount that a borrower must pay in addition to the original amount she deposited. The annual earnings that are sacrificed when wealth is invested in a given asset or business. The interest sacrificed by investing in a given business is often called the cost of capital.

Internal Rate of Return: The interest rate that causes the equivalent receipts of a cash flow to equal the equivalent disbursements of that cash flow. Also, the interest rate that reduces the present worth amount of a series of receipts and disbursements to zero. See Rate of Return.

Investment Amount: The investment amount is the sum of all yearly discounted costs. The investment amount is interpreted to include the total price the agency is proposing to pay over the life of the project or system, regardless of the type of purchase or the payment schedule.

Labor: Human inputs into production process, in contrast with Capital.

Law of Demand: People purchase more of any particular good or service as its relative price falls; they purchase less as its relative price rises.

Law of Supply: At higher relative prices, the quantity supplied of a good will increase; at lower relative prices, smaller quantities will be supplied.

Learning Curve: the curve describing how costs of production decline as cumulative output increases over time

Level of Service: A Performance Measure describing how well a particular facility is serving the demands placed on it, for instance the speed of traffic (or its correlates flow and density).

Life Cycle Costs (LCC): the full cost over the entire life-cycle of a system from construction to destruction, generally categorized into Acquisition costs, Operating and Support costs, and Disposal costs

Long Run: the time period over which every input can be varied, no inputs are fixed.

Low Occupancy Vehicles (LOV): Vehicles carrying only the driver, or the driver and one passenger.

Marginal Cost: the additional cost corresponding to an additional unit of output produced, calculated by dividing the price of a marginal input by the marginal product of that input

Marginal Costs And Benefits: costs and benefits that result from choosing a little bit more of one thing and a little bit less of another

Marginal Product: the amount by which output increases with the addition of one unit of an input

Marginal Propensity To Consume: the amount by which consumption increases when disposable income increases by a dollar

Marginal Utility: the extra utility, or enjoyment, a person receives from the consumption of one additional unit of a good

Mobility: The ease of moving on the transportation network, contrast with accessibility.

Model: a set of assumptions and data used by engineers and economists to study an aspect of a system and make predictions about the future or about the consequences of various changes

Moral Hazard: principle that says that those who purchase insurance have a reduced incentive to avoid what they are insured against

Net Benefit.: The Net Benefit is calculated by summing all yearly net benefits for the life of the project or system

Non-Recurring Benefits: usually consist of cost reduction or value enhancement. Examples of cost reduction benefits would be improved operations resulting in reduced resource requirements. Examples of value enhancement benefits would be improved data utilization and operational effectiveness.

Non-Recurring Costs: usually consist of the initial capital investment and other non-recurring costs. Examples of non-recurring costs would be site and facility preparation, new equipment, initial studies, software conversion, one-time training, personnel relocation, and contractual or other support services.

Normal Good: a good the consumption of which rises as income rises

Opportunity Cost: the cost of a resource, measured by the value of the next-best, alternative use of that resource

Opportunity Sets: a summary of the choices available to individuals, as defined by budget constraints and time constraints

Outputs: the outcomes of a production process

Overhead Costs: the costs a firm must pay just to remain in operation. They do not depend on the scale of production

Pareto-efficient allocations: resource allocations, that cannot make a person better off without making someone else worse off

Partial Equilibrium Analysis: an analysis that focuses on only one or a few markets at a time

Payback Period: The payback period is the time required for the net benefit to pay back the investment amount. This indicates how soon the state will recover its investment amount. The payback period is calculated by subtracting the yearly net benefits from the investment amount. Fractions of the final payback year should be presented in decimal form so that zero investment amount remains.

Performance Measure: Any indicator of how well a system is doing. Some performance measures are better than others, Consumer’s Surplus, if it can be measured, is the best economic efficiency measure.

Present Discounted Value: how much an amount of money to be received in the future is worth right now

Pre-Trip Travel Information: A user service that will provide travelers with information before their departure and before the mode choice is made.

Price: The amount of money, or other goods, that you have to give up to buy a good or service.

Price Elasticity Of Demand: the percentage change in quantity demanded as a result of a 1 percent change in price

Price Elasticity Of Supply: the percentage change in quantity supplied as a result of a 1 percent change in price

Principal-Agent Problem: any situation in which one party (the principal) needs to delegate actions to another party (the agent), and thus wishes to provide the agent with incentives to work hard and make decisions about risk that reflects the interests of the principal

Private Good: A good exclusively owned that cannot be simultaneously used by others.

Privatization: the process whereby functions that were formally run by the government are delegated instead to the private sector

Producer’s Surplus: See Profit

Production Efficiency: the condition in which firms cannot produce more of some goods without producing less of other goods

Production Function: the relationship between the inputs used in production and the level of output

Production Possibilities Curve: a curve that defines the opportunity set for a firm or an entire economy and gives the possible combinations of goods (outputs) that can be produced from a given level of inputs

Productive Resources: The inputs of labor, natural resources and capital used to generate new goods and services.

Productivity: (GDP per hour) how much an average worker produces per hour, calculated by dividing real GDP by hours worked in the economy

Profits: The excess of income over all costs, including the interest cost of the wealth invested. Also called Producer’s Surplus. Contrast with Consumer[’s] Surplus

Public Good: a good that costs little or nothing for an extra individual to enjoy, and that it costs a great deal to prevent an extra individual from enjoying, such as national defense

Pure Profit (Monopoly Rents): the profit earned by a monopolist that results from its reducing output and increasing the price from the level at which price equals marginal cost

Rational Expectations: the expectations of individuals that are formed by using all available information

Real Interest Rate: the actual increase in buying power of saved money, equal to the nominal interest rate minus the rate of inflation

Recurring Benefits: would be reductions in rentals and leases, maintenance, data communications charges, data processing charges, personnel salaries and benefits, travel and training, contractual services, and technical support. Also included would be cost avoidance; that is, the avoidance of future costs by implementing the proposed system or project. Examples of cost avoidance would be information systems operational charges, equipment, and software development.

Recurring costs: will have to be paid throughout the life of the system or project. Recurring costs may include rentals and leases, maintenance, license fees, data communications charges, data processing charges, personnel salaries and benefits, travel and training, contractual services, and technical support.

Return on Investment: Return on Investment is the net benefit expressed as a percentage of the investment amount. The Return on Investment is calculated by dividing the net benefit by the investment amount. The Return on Investment helps the evaluators compare budget issues of different sizes or scopes. A small investment in a small project or system can result in a greater return on investment than a large investment in a large project or system.

Revenue Curve: the relationship between a firm's total output and its revenue

Revenues: the amount a firm receives for selling its products, equal to the price received multiplied by the quantity sold

Risk: the loss associated with a decision, with a certain probability, contrast with Uncertainty

Risk Averse / Loving / Neutral: given equal expected returns and different risks risk averse people will choose assets with lower risk, risk loving people will choose assets with higher risk, and risk-neutral individuals will not care about differences in risk

Risk Premium: the additional interest required by lenders as compensation for the risk that a borrower may default; more generally, the extra return required to compensate an investor

Shadow Price: the true social value of a resource

Short Run: The period during which some inputs are fixed and cannot be varied.

Single Occupancy Vehicles (SOV): Vehicles carrying only the driver.

Signaling: conveying information, for example by earning a college-degree, to persuade an employer that a prospective worker has desirable characteristics that will enhance his productivity

Slope: the amount by which the value along the vertical axis increases as a result of a change in a unit along the horizontal axis; the slope is calculated by dividing the change in the vertical axis (the "rise") by the change in the horizontal axis (the "run")

Smart Card: Plastic cards with an embedded integrated circuit chip containing memory and microprocessor.

Social Costs: Private costs plus external costs.

Social Marginal Cost: the marginal cost of production, including the costs of any negative externality, such as air pollution, borne by individuals in the economy other than the producer

Static Expectations: the belief of individuals that today's prices and wages are likely to continue into the future

Substitute: a good for which demand increases when the price of a closely related good increases

Substitution Effect: the reduced consumption of a good whose price has increased that is due to the changed trade-off, the fact that one has to give up more of other goods to get one more unit of the high-priced good; the substitution effect is associated with a change in the slope of the budget constraint

Sunk Cost: a cost that has been incurred and cannot be recovered

Supply Curve: the relationship between the quantity supplied of a good and the price, whether for a single firm or the market (all firms) as a whole

Supply-Constrained Equilibrium: the equilibrium that occurs when prices are stuck at a level below that at which aggregate demand equals aggregate supply; in a supply-constrained equilibrium, output is equal to aggregate supply but less than aggregate demand

Tangible Benefits: Benefits quantifiable in terms of direct dollar values; for example, the benefit of future equipment or personnel cost avoidance.

Tangible Costs: Costs quantified in terms of direct dollar values, such as the cost of equipment or services.

Technological Change: An advance, usually scientific, that causes an increase in output to occur relative to the quantity of inputs.

Theorem: a logical proposition that follows from basic definitions and assumptions

Theory: a set of assumptions and the conclusions derived from those assumptions put forward as an explanation for some phenomena

Trade-Offs: the amount of one good (or one desirable objective) that must be given up to get more of another good (or to attain more of another desirable objective)

Transactions Costs: the extra costs (beyond the price of the purchase) of conducting a transaction, whether those costs are money, time, or inconvenience

Transponder: An electronic tag carried by a motor vehicle that has electronically stored information that can be retrieved by a roadside reader.

Trip: The period during which a vehicle is continuously traveling from its point of origin to its destination. The vehicle may stop for short periods during the trip without causing discontinuation of the trip if no change occurs in the loaded weight.

Trip Ticket: An electronic ticket stored on the transponder which contains trip related information such as the carrier, vehicle, driver and transponder IDs, commodity code, weight measurements, date/time/location and results of last clearance event. The trip ticket is transmitted during DSRC between vehicle and roadside reader equipment.

Uncertainty: the unknown outcomes of a decision, cannot be specifically targeted except by gathering more information. Contrast with risk.

Utility: the level of enjoyment an individual attains from choosing a certain combination of goods

Utility Possibilities Curve: a curve showing the maximum level of utility that one individual can attain, given the level of utility attained by others

Value of Time: The dollar value of time, for instance $10/hour. Value of time depends on the use to which the time is put, what it substitutes for, and the quality of the time. Typically time in motion is valued less highly than time waiting.

Variable Costs: Costs of a production process that increase or decrease along with changes in level of production, as opposed to fixed costs.

Variable Inputs: inputs that rise or fall with the quantity of output

Vehicle Miles Traveled (VMT): The number of vehicles on a road segment multiplied by the length of a segment, summed for all road segments under study.

Vertical Equity: the principle that says that people who are better off should pay more taxes

Willingness to Pay: The amount a consumer would pay for a good or service, not the amount he actually pays, which is the Price. Measured by the height of the demand curve.

Yearly Total Benefit: Total of the benefits for each year over the proposed life of the system or project.

Yearly Total Cost: Total of the costs for each year over the proposed life of the system or project.

Yearly Discounted Benefit: Each yearly total benefit is discounted using the present value factor for that year (see Discount Rates).

Yearly Net Benefit: The yearly discounted cost is subtracted from the yearly discounted benefit for each year over the life of the system or project.

Zero Elasticity: a demand (or supply) curve has zero elasticity if the quantity demanded (or supplied) does not change at all if price changes; the demand (supply) curve is vertical

References:

The FACS Journalist's Guide to Economic Terms

Joseph Stiglitz’s On-line Glossary from Economics textbook

Ged Ryan Cost Benefit Analysis - Further Definitions

Virtual Schoolhouse Contract Repair Enhancement Program Course Glossary

DOT Transportation Glossary