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When to Use Benefit-Cost Analysis

Benefit-Cost Analysis is most applicable for evaluating proposed projects that meet the following criteria: (1) The potential project expenditure is significant enough to justify spending resources on forecasting, measuring and evaluating the expected benefits and impacts. (2) The project motivation is to improve the transportation system's efficiency at serving travel and access-related needs, rather than to meet some legal requirement or social goal. (3) Environmental or social impacts that are outside of the transportation system efficiency measurement are either: (a) negligible in magnitude, (b) measurable in ways that can be used within the benefit-cost framework, or (c) to be considered by some other form of project appraisal outside of the benefit-cost analysis.

Benefit-Cost Analysis is most applicable for evaluating proposed projects that meet the following criteria:

(1) The potential project expenditure is significant enough to justify spending resources on forecasting, measuring and evaluating the expected benefits and impacts.

2) The project motivation is to improve the
transportation system's efficiency at serving travel and access-related needs, rather than to meet some legal requirement or social goal.

(3) Environmental or social impacts that are outside of the transportation system efficiency measurement are either: (a) negligible in magnitude, (b) measurable in ways that can be
used within the benefit-cost framework, or (c) to be considered by some other form of project appraisal outside of the benefit-cost analysis.

Benefit-Cost Analysis is neither necessary nor desirable to justify all transportation projects. It may not always be appropriate in the following cases:

• Projects motivated by a need to meet legal requirements — such as safety standards, handicapped access standards or environmental impact standards. Changes in population growth, urban development, travel patterns or legal regulations may necessitate new projects to upgrade existing transportation facilities and services, build new facilities or provide new services to meet those current legally required standards.
• Projects motivated primarily by a need to address distributional equity concerns — i.e., legal, political or moral desires for fairness. This includes the provision of some minimum level of basic (road, transit, air or sea) access for isolated or ill-served regions, communities or neighborhoods. It can also include some projects motivated by economic development, i.e., enabling the attraction and creation of new jobs particularly in economically depressed areas. Finally, some decisions are based on the desire (and in some cases, the legal need) to avoid selection of projects and project designs that focus undue negative impact on socially vulnerable groups (such as low income, elderly, or minority groups)
• Projects that are merely maintaining, renovating or rehabilitating already-built transportation facilities, which are necessary to avoid losing the already-demonstrated benefits of those existing facilities (unless there are viable alternatives present)

It is also inappropriate to rely solely on Benefit-Cost Analysis in situations where there are special concerns that must also be considered outside of that analysis. Since benefit-cost analysis focuses on the comparison of total benefits and total costs in dollar terms, some particular concerns affecting a given project may be either hidden or missed within the calculation of total benefits and total costs. In some cases, the desirability of projects needs to be considered in terms of their effectiveness at reducing certain key objectives — such as air pollution reduction, creation of new jobs, or providing access for low-income households who do not own a car. In such cases, cost-effectiveness analysis (which measures environmental or social benefits per dollar of transportation project spending) may be appropriate, either in addition to or instead of benefit-cost analysis.

 

Acknowledgements

Hosted by the Caltrans Office of Transportation Economics

Created by the California Center for Innovative Transportation at the Institute of Transportation Studies at the University of California at Berkeley and the Committee on Planning and Economics of the American Society of Civil Engineers

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