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Ginés de Rus
M. Pilar Socorro
Jorge Valido
Javier Campos
Economic
Evaluation
of Transport
Projects
Economic Evaluation of Transport Projects
Ginés de Rus · M. Pilar Socorro · Jorge Valido ·
Javier Campos
Economic Evaluation
of Transport Projects
Ginés de Rus M. Pilar Socorro
Department of Applied Economic Analysis Department of Applied Economic Analysis
University of Las Palmas de Gran Canaria University of Las Palmas de Gran Canaria
Las Palmas de Gran Canaria Las Palmas de Gran Canaria
Spain Spain
Departament of Economics
Javier Campos
University Carlos III of Madrid
Department of Applied Economic Analysis
Getafe, Spain
University of Las Palmas de Gran Canaria
FEDEA Las Palmas de Gran Canaria
Madrid, Spain Spain
Jorge Valido
Department of Applied Economic Analysis
University of Las Palmas de Gran Canaria
Las Palmas de Gran Canaria
Spain
ISBN 978-3-031-35958-3 ISBN 978-3-031-35959-0 (eBook)

https://doi.org/10.1007/978-3-031-35959-0
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature
Switzerland AG 2023
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether
the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse
of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and
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The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication
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The publisher, the authors, and the editors are safe to assume that the advice and information in this book
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the editors give a warranty, expressed or implied, with respect to the material contained herein or for any
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claims in published maps and institutional affiliations.
This Springer imprint is published by the registered company Springer Nature Switzerland AG
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
Preface
The purpose of this book is to show how the social appraisal of public policies
can be very helpful for the improvement of public intervention in the economy. The
economic judgement of whether an investment project or a new regulation is socially
worthy is based on the comparison of the benefits and costs of public intervention. We
are convinced that the set of cost–benefit analysis general equilibrium rules is the best
approach for the social appraisal of most of the projects in the transport industry. A key
idea is to distinguish between impact and net social welfare; another is to understand
that the full potential of cost–benefit analysis can only be obtained with the right
institutional design. Many of the criticisms concerning the limited influence of cost–
benefit analysis in actual policy decisions do not distinguish between the method
and the institutional framework in which the evaluation takes place. In this book, we
develop a simple model where the reader can see the derivation of the practical rules
for the assessment of transport projects. Then, the cost–benefit analysis rules are
used for the evaluation of an investment project in rail infrastructure, for the decision
on the transport network to be constructed, and for the analysis of a public policy
consisting of subsidizing air transport. Both cases show the power of economics to
realize when it is socially desirable to spend public money on a particular intervention
and also to choose between alternative ways to achieve the same target.
The research presented in this book draws on the technical report commissioned
to the authors by the Independent Authority of Fiscal Responsibility (AIReF) for
the Spending Review on Transport Infrastructure. It was funded by the EU via the
Structural Reform Support Programme (SRSS). It reflects only the authors’ views
and does not imply a policy position of the European Commission or the AIReF,
neither are responsible for any use that may be made of the information it contains.
We are deeply indebted to Per-Olov Johansson and Bengt Kriström for their advice
and encouragement. Finally, we are also grateful to the staff at Springer, specially
v
vi Preface
to Sharmila Anbu, for their advice and support during the publication process. Any
remaining errors are our sole responsibility.
Las Palmas de Gran Canaria, Spain Ginés de Rus

M. Pilar Socorro
Jorge Valido
Javier Campos
Contents
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 Cost–Benefit Analysis of Transport Projects: Theoretical
Framework and Practical Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.2 Cost–Benefit Analysis of Transport Projects: Theoretical
Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2.1 A Basic Model to Measure Social Welfare Changes
due to Transport Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2.2 Measuring the Economic Effects of Transport Projects . . . . 17
2.3 Practical Rules for Cost–Benefit Analysis . . . . . . . . . . . . . . . . . . . . . . 21
2.3.1 Guidelines for the Measurement of the Direct Effects . . . . . 22
2.3.2 Rules for the Use of Shadow Prices . . . . . . . . . . . . . . . . . . . . . 30
2.3.3 Indirect Benefits and Wider Economic Benefits
of Transport Projects. What to Do? . . . . . . . . . . . . . . . . . . . . . 34
2.4 The Relationship between Pricing and Investment . . . . . . . . . . . . . . . 36
2.4.1 Investment Decisions When There is no Economic
Cost of Public Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.4.2 Investment Decisions When There is an Economic
Cost of Public Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3 Cost–Benefit Analysis of Transport Investments:
An Application to High-Speed Rail Investments . . . . . . . . . . . . . . . . . . . 43
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
3.2 Defining a Rail Project Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.3 Demand Forecasting and Rail Project Evaluation . . . . . . . . . . . . . . . . 47
3.4 The Costs of Building and Operating High-Speed Rail Projects . . . 48
vii
viii Contents
3.5 Cost–Benefit Analysis of High-Speed Rail Projects . . . . . . . . . . . . . . 51

3.5.1 Methodology to Compute the Social Welfare Effects
of a High-Speed Rail Project . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.5.2 Cost–Benefit Analysis of a New High-Speed Line:
An Illustration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
3.5.3 The Equivalence of the Different Approaches . . . . . . . . . . . . 59
3.6 Additional Economic Benefits of High-Speed Rail . . . . . . . . . . . . . . 61
3.7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
4 The Consequences of Pricing Policies on Investment Decisions . . . . . . 67
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
4.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
4.3 Optimal Transport Infrastructures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
4.3.1 Stage 3: Users’ Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
4.3.2 Stage 2: Optimal Ticket-Prices . . . . . . . . . . . . . . . . . . . . . . . . . 71
4.3.3 Stage 1: Optimal Transport Infrastructure Provision . . . . . . . 72
4.4 Empirical Illustration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
5 Cost–Benefit Analysis of Transport Policies: An Application
to Subsidies in Air Transport Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
5.2 The Basic Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
5.2.1 Equilibrium in the Absence of Public Subsidies . . . . . . . . . . 85
5.3 Cost–Benefit Analysis of Policies Aimed at Ensuring Air
Connectivity of Resident Passengers . . . . . . . . . . . . . . . . . . . . . . . . . . 87
5.4 Comparison of Different Policies Aimed at Ensuring Air
Connectivity of Resident Passengers . . . . . . . . . . . . . . . . . . . . . . . . . . 91
5.4.1 Ad Valorem Subsidies Only for Residents . . . . . . . . . . . . . . . . 91
5.4.2 Specific Subsidies Only for Residents . . . . . . . . . . . . . . . . . . . 94
5.4.3 Ad Valorem Versus Specific Subsidies Only
for Residents: The Effects on Prices and All Agents’
Surpluses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5.5 Some Numerical Illustrations and Empirical Evidence . . . . . . . . . . . 100
5.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Appendix 1: Mathematical Expressions of the Model . . . . . . . . . . . . . . . . . 106
Appendix 2: Some Empirical Evidence: The Case of Spain . . . . . . . . . . . . 109
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Chapter 1
Introduction
A project, interpreted as any public policy affecting the economy, should not be
approved unless the intervention is, not only expected to generate social benefits
above the social costs, but with a net result superior to the next best alternative. In
summary, the social welfare change should be positive considering all the relevant
effects on the economy. This implies a rigorous exercise of identification, measure-
ment, and valuation of the flow of benefits and costs of the ways to deal with the
problem at hand so that the analyst can provide the government, and society, with
an estimation of the consequences of public intervention on social welfare. This is
what cost–benefit analysis (CBA) is about.
An investment in infrastructure or a public policy changing the regulation in a
mode of transport has consequences beyond the primary market, directly affected
by the intervention, but on many other markets through different ways. First, on the
direct users of the transport services; and then, in secondary markets with products
that are complements and substitutes of markets affected by the change in transport
costs due to the project, including changes in modal split, externalities, and other
second-order effects. Even the income multiplier effect on the economy could be
significant under conditions of involuntary unemployment.
A key point to avoid misunderstandings concerning the purpose of CBA is the
distinction between impact effect and net welfare effect. Before the approval of the
project, the social appraisal of the intervention requires a clear distinction between
the impact on gross value added, employment, and so on, and the net welfare effect
of the project. The income multiplier effect of the project is a good example of an
actual impact of public expenditure, but is irrelevant in the calculation of the net
social benefit when the multiplier is similar to the next best alternative.
The evaluation must be carried out before the approval of the policy. The socially
useful analysis is essentially ex-ante, comparing, based on the available information,
the benefits and costs that are expected with the public policy under evaluation. To
guarantee an unbiased appraisal, the practitioner in charge of this task should be
indifferent in his preferences regarding the project. This requires a neat independent
evaluation process with respect to the government and interest groups. The reason is
© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 1

G. de Rus et al., Economic Evaluation of Transport Projects,
https://doi.org/10.1007/978-3-031-35959-0_1
2 1 Introduction
very simple: the decisions corresponding to the maximization of social welfare may
not have to be aligned with those corresponding to the maximization of the prob-
ability of reelection, or the goals of some interest groups affected by the interven-
tion. For this reason, institutional design is at least as important as the methodology
(see Engel et al., 2014).
Public officials and analysts have different tools to deal with this task. Our first
option is CBA, the way of thinking of the economist, as the best tool available for
the social appraisal of transport improvements, a field where CBA has been widely
applied, producing a sound body of theory and evidence. It is the method that we
have at our disposal to assess the net welfare changes of projects and public policies
resulting from the intervention compared with the counterfactual. Firstly, it requires
the establishment of an analytical framework in which the problem is identified, all
feasible alternatives to solve it are considered, all groups significantly affected by the
intervention count, and the appraisal is done respecting the individuals’ preferences
and expressing the effects in monetary units.
There are other tools for the evaluation of transport projects, like multi-criteria
analysis and computable general equilibrium models (CGE). The first one does not
measure changes in social welfare, and the second one is more appropriate for large
shocks, such as macroeconomic shocks in the economy. When CGE is used for
the social appraisal of projects, like the construction of a new road, the use of
an existing CGE model designed for large economic impacts is not going to add
any value to the CBA of the project unless a specific CGE model is developed
(see de Rus, 2023; Kriström, 2023). A standard CGE model built to capture the
effects of trade liberalization will barely capture differences between the net welfare
effects of urban commuting or high-speed rail (HSR) projects. Both projects will
have induced effects in the economy following the initial investment, but their direct
effects and possible wider economic benefits (WEBs) are substantially different
(see Laird & Venables, 2017).
The justification of projects based on the impact on the economy, adding multiplier
effects and the like, is bad practice in CBA. In many cases, investment in transport
infrastructure is often justified by politicians as a sufficient condition for economic
development. Laird et al. (2014) warn of the use of expenditure and costs instead of
genuine benefits. They mention the recent shift by planners in the UK, using changes
in gross value added, including wages, as a benefit.
Transport projects are usually evaluated using the derived demand. This demand
summarizes valuable information on the effects of the reducing transport costs on
the economy. The use of the well-known ‘rule of a half’ for the measurement of the
benefits of transport projects has been confused with a narrow partial equilibrium
approach where the practitioner is unduly assuming everything constant in the rest of
the economy. Moreover, the use of market demand functions for general equilibrium
welfare effects assessment is justified, under some conditions. Using reduced-form
elasticities, it is possible to assess the welfare effects of projects as they incorporate
general equilibrium effects in all the affected markets (Chetty, 2009; Just et al., 2004;
Kleven, 2018).
1 Introduction 3
Politicians, unsatisfied with the net welfare effect approach, use to argue that
public transport infrastructure investment delivers other benefits beyond direct user
benefits, such as changes in productivity and industry reorganization. The problem is
that, in principle, those gains in productivity are not additional and have already been
measured with the transport demand (Mohring & Williamson, 1969). Some projects
have WEBs, but some distortions are required in the rest of the economy, like the
endogeneity of the wage gap in the case of agglomeration economies following
changes in proximity and labour density (Venables, 2007), or the benefits of urban
redevelopment in the presence of a market failure (Laird & Venables, 2017).
It is possible to measure the social benefits of a transport project with the market
demand in the primary market in the absence of distortions in the rest of the economy
(Harberger, 1965; Johansson, 1993). Even with distortions in secondary markets, it is
unnecessary to include indirect and induced effects when these effects are expected
to be of the same order of magnitude in the next best alternative. For relatively small
projects, the observed general equilibrium demand is usually sufficient to assess the
expected welfare effect of public intervention.
This book is about CBA of policies and investment projects in transport (see
Mackie et al., 2014), but is neither a textbook nor a comprehensive survey. The
purpose of the book is to stress the importance of having an analytical framework, a
model where the practical criteria of measurement are obtained. CBA is the appraisal
methodology most frequently used in the main supranational and national guidelines
for the economic evaluation of investment projects. A quick revision of the guidelines
of the European Investment Bank, the European Commission, or the Asian Develop-
ment Bank; as well as some countries with an evaluation tradition, such as the UK,
the Netherlands, or Sweden, shows they share a common body of rules of thumb
that can be applied to standard projects. The warning is to avoid the mechanical
transfer of these rules, sometimes mixing different sources, with the risk of leading
to inconsistencies, double counting, and other errors that bias the results.
Therefore, the starting point is to have a model that establishes a rigorous analytical
evaluation framework, with explicit assumptions, and from which practical evalua-
tion rules are formally derived (see Johansson, 1993; Johansson & Kriström, 2016).
This is the objective of this book, to present a basic model for the evaluation of
transport projects and policies and to apply the rules to an investment project and a
public policy.
CBA is based on the monetary valuation of changes in individual well-being
caused by the implementation of a project compared with the counterfactual, to
assess whether society is better-off with such a public intervention. The incremental
change in individuals’ welfare responds to the valuations made by the affected
parties, directly (stated preferences) or through the observed behaviour in the market
(revealed preferences). Economists use willingness to pay and willingness to accept
to measure the benefits and costs of public policies. Although it is not possible to
4 1 Introduction
measure the change in individual well-being because it is not observable, it is possible

to obtain the monetary valuation of that change.1
Measurement of the change in individual utility (well-being) according to private
valuations is the previous step to assess the change in social welfare. We proceed as
if the government maximizes social welfare,2 which can obey different functions but
usually responds to the following four properties (Mas-Colell et al., 1995, p. 825):
(i) Non-paternalism. In the expression of social preferences, only individual utilities
matter. (ii) Paretian property. Welfare increases with the utility of each individual. If
one individual is better-off without making anyone else worse-off, there is an increase
in social welfare. (iii) Symmetry. In the evaluation of social welfare, all individuals
are on the same footing. (iv) Concavity. This is based on inequality aversion. The
extent of compensation is determined by the degree of inequality in society.
The social welfare function, therefore, depends on the well-being of the indi-
viduals, who try to maximize their utility according to their preferences, prices
and income. The utility of individuals is a function of the goods and services they
consume, whose prices and quantities change with a public intervention that modifies
the equilibrium in the economy, affecting them as consumers, owners of the factors of
production, taxpayers, and those affected by changes in externalities. CBA attempts
to assess the effect of government intervention on social welfare, including all social
groups.3
This evaluation procedure is not only useful ex-ante, but also when the project has
been completed (ex-post) or when it has been running for a sufficiently long period
of time. In these last two cases, though the evaluation does not influence whether the
project should have been approved or rejected, it may help to introduce modifications
and, definitively, allows to improve future evaluations.
The usual approach in the ex-post evaluation is to redo the calculations that were
done in the ex-ante CBA but with observed values. Although this procedure provides
a good deal of information about the actual economic effects of the projects and how
these effects compare with the ex-ante analysis, its weakness is that the evaluation
is carried out according to the same model as the ex-ante evaluation.
Another method, based on causal inference, can be followed to carry out the ex-
post evaluation. It consists of applying statistical models to the data observed before
and after the transport interventions, trying to estimate the incremental economic
effect of the project. It is an empirical method and, although it gets around the
problems of CBA mentioned above, it has to overcome other statistical problems to
adequately reveal causal effects. Both methods pursue the same goal: to understand
the impact of public intervention on the economy through investments and transport
policies. The results of the ex-post econometric analysis feed and reinforce the ex-ante
CBA.
1 For cases where the individual’ preferences are distorted and, hence, they are not a good guide for
individual’ well-being (see Adler & Posner, 2001).
2 Even if this is not the case, CBA is still socially useful under the appropriate institutional design.
3 For an analysis of who stand in CBA (see Johansson & de Rus, 2019, and Zerbe, 2018).
1 Introduction 5
When public officials calculate the net social benefit of a project and obtain a posi-
tive result, most of the time they are applying the criterion of potential compensation,
which implies that, if the redistributive consequences of the project were sufficiently
regressive, it might happen that the conventional net present value does not reflect
the real impact on welfare or, what is worse, that its sign changes. What is the way
out of this problem?
In practice, the potential compensation criterion is usually applied under the
assumption that the fiscal policy has mechanisms to successfully redistribute income.
Its application is also justified by arguing that since the government carries out many
projects, in the long-term, the society will be better-off. It should not be forgotten that,
as in the case of expropriation, the criterion of potential compensation is accompanied
by somewhat imperfect compensation that mitigates the losers’ damage. It could also
be argued that the difficulties of identifying the final beneficiaries and losers in many
cases can make full compensation impossible; or that, being possible, the costs of
identifying winners and losers and establishing compensation mechanisms outweigh
the benefits.
This book is on the social appraisal of transport projects. Its purpose is to show
how the economic evaluation of transport investments and policies provides valu-
able information for decision-making beyond intuition or goodwill. Although the
methodology is common to many other areas, the characteristics of transport as an
economic activity make this field particularly suitable for the application of CBA.
Transport improvements resulting from investment projects and policies can be typi-
cally considered as exogenous interventions in transport markets, which move the
economy from one equilibrium to another, commonly through the reduction of the
generalized price (monetary price, time, and other disutility components).
The different modes of transport have experienced some organizational and tech-
nological changes in the recent past. A high-speed train over medium distances is
closer to air transport than to traditional railway service. The transport and logistics of
container handling with the new container ships and the new specialized port termi-
nals use very advanced technology and bear little resemblance to the manual loading
and unloading of cargo that stevedores formerly carried out in ports. Despite all the
technological changes and the structural differences between the different transport
modes, they share some common characteristics from the perspective of economic
analysis. Some of them are particularly relevant for the economic appraisal of public
intervention in transport markets (see de Rus et al., 2003).
Production Technology: Infrastructure and Services
Two different types of activities can be distinguished within the transport industry.
Public and private firms are engaged in the construction and operation of infras-
tructures (ports, airports, roads, etc.), while other firms and individuals operate the
vehicles that use these infrastructures to produce the services supplied to other firms
or for their use (shipping companies, airlines, bus operators, private cars).
6 1 Introduction
In all modes of transport, these two elements are present when examining their
production function. Differences between transport modes are largely due to tech-
nological reasons. Both the characteristics of the vehicles and the infrastructure they
require, somewhat affect the type of market organization and the degree of feasible
competition. In the case of railways, the management of the infrastructure and the
operation of services require a high degree of coordination, which partially explains
why railways were vertically integrated in the past. In contrast, roads hardly need
coordination between the vehicles using the infrastructure, in the sense that it is
not necessary to determine schedules for access to the infrastructure, and hence, the
market works with a separation between the companies that are dedicated to the
management of the infrastructure and the operators of the vehicles.
The infrastructure side of the transport industry is, in many cases, subject to public
provision, and the social appraisal of projects is required for an efficient allocation
of public funds.
A Basic Input: Time
The economic analysis of transport activities requires the explicit consideration of an
essential input in the production function of transport services: the time of the users
(both in the case of passengers and freight). Many decisions of firms and individuals
cannot be understood without explicitly including time in the analysis. Time is an
input provided by the transport user.
The demand for transport is a derived demand. In general, the user moves between
the origin–destination points for other purposes (work, study, leisure). Therefore,
the user tries to minimize the generalized cost of the trip, which includes the price
and the total value of the time invested by the user. In freight transport, the time
invested is also important since the speed and reliability of deliveries are inversely
related to storage costs. Many models in transport economics are based on a trade-
off between production costs and user costs. The evaluation of transport systems,
the configuration of networks, the modal distribution, and the structure of markets
requires the consideration of the trade-off between both types of cost.
Transport Supply: Non-storability, Indivisibilities and Sunk Costs
Transport is not storable. Once the operator supplies a certain volume of capacity
units, it must be consumed at the time when the service is being produced, or it
will be irreversibly lost. This characteristic has important implications for transport
managers, which must give an adequate dimension to their supply according to the
characteristics of the demand.
Transport infrastructure has limited capacity, measured by the maximum number
of vehicles capable to operate at the same time. Infrastructure has discontinuities
in the possibility of its expansion (e.g., to increase the capacity of a road, an entire
additional lane must be built, or for an airport to accommodate more arrivals and
departures of aircraft, a new runway or terminal must be built).
1 Introduction 7
If an infrastructure manager provides unnecessary capacity or a firm puts more

vehicles in circulation than necessary, most of the supply will be lost, with conse-
quent waste of resources. But if, on the contrary, the capacity is insufficient, queues,
congestion, and lower service quality will be the result.
In addition to the problems of mismatches between supply and demand, the
non-storability nature of infrastructure and transport services also has implications
concerning the demand profile and the size of the infrastructure and the fleet of
vehicles. Transport demand is usually not uniform during the day, neither during the
days of the week nor during the period of the year. This means that to avoid prob-
lems of scarcity or congestion, operators must dimension capacity for peak periods.
Hence, in the off-peak, part of the infrastructure and vehicles will be unused without
any savings given the high proportion of fixed or semi-fixed costs in the transport
industry.
Infrastructures are specific assets, and their costs are sunk, since the assets cannot
generally be used for any other purpose than that for which they were built. On
the other hand, these are assets with very long useful life and with a high share of
the costs generated in the initial construction phase. Given the long-life span of the
assets, the high and sunk investment costs, and demand uncertainty, the economic
appraisal of infrastructure projects is essential.
Network Effects
One of the economic characteristics of the transport industry, shared by other indus-
tries such as telecommunications or electricity, is the existence of network effects.
In the case of transport, these network economies affect both the infrastructure side
of the market (physical networks) and the operation of vehicles. In infrastructure,
adding a new connection to a network, such as an additional airport or a new road,
increases the value of existing assets, increasing the possible combinations. These
network effects must be considered when evaluating the benefits of the entry into
service of a new infrastructure, and for the design of its capacity, since the number
of users who finally use the infrastructure and the social benefits may be higher than
in the absence of network effects.
In transport services, some network effects arising from the advantages of a large
number of users can also be identified. In particular, in the modes of regular trans-
port—buses, air transport, maritime services—as the number of passengers increases,
companies respond by introducing greater frequencies, which allows all users to
reduce their waiting times and to have a more convenient schedule.
A dense network allows changes in the productive organization like the ‘hub-
and-spoke’ type, in which there are a series of main nodes (hubs) that are connected
by large capacity vehicles, and a series of secondary nodes that only have a direct
connection with one of the main nodes and that are served by smaller vehicles and
lower frequencies. With this type of route structure, companies obtain benefits from
the economies of vehicle size, which can be used in segments with high traffic.
8 1 Introduction
Negative Externalities
The construction of the infrastructure and the provision of transport services are
associated with negative externalities such as pollution or noise. The unavoidable
use of a physical space to locate these assets requires the consumption of natural
resources (land, diversion of natural water courses, impoverishment of the landscape,
barrier effects for natural habitats, etc.), which must be valued in project evaluation.
The use of vehicles produces many other externalities such as pollution and noise.
Accidents also fall into this category because, although a large part of the costs
generated by an accident is suffered by the agent who causes the accident (personal
injury and vehicle damage) or has to pay through the insurance (damages to third
parties), there are other costs that he imposes on the rest of society like pain and
suffering not covered by legal compensation, police costs, hospital costs, etc.
Congestion is also considered an externality. It is an externality that users of
transport services cause each other (and in principle none outside the industry is
affected). The externality occurs because each user, when making his decision to use
a road, only takes into account the cost to him of the time he will spend on the trip,
plus the monetary cost of using the vehicle, but does not take into account that he is
making circulation less fluid for everyone. Then, he is imposing a cost in terms of
extra time on other road users that the user does not have to pay and, therefore, does
not internalize in his travelling decisions. The reduction of congestion is a benefit
associated with many projects consisting of the expansion of capacity.
Agglomeration Economies
The location of economic activities matters, and new insights appear once the space
is included in the economic analysis of transport improvements. Social appraisal of
projects that change proximity and modify initial location decisions by firms and indi-
viduals has benefitted from this change of perspective. The analysis of the problems
of industrial location, regional development, or formation of cities emerges strongly
with the so-called new economic geography in which the concepts of increasing
returns to scale and imperfect competition are fundamental to explain the pattern
of the spatial location of economic activity. Both concepts play a decisive role, first
in the new industrial economics, then in international trade and economic growth
theory, and finally in spatial economics (Krugman, 1998).
In the traditional model of perfect competition, the effects of an investment in
infrastructure that reduces the cost of transport are well-known: reduction of marginal
cost, profits in the short-term, entry of new firms, and new equilibrium in the long-
term with a lower price and higher quantities. Consumers are the ultimate benefi-
ciaries of reduced transport costs. Nevertheless, relaxing the assumption of perfect
competition, we find positive externalities due to the increase in firms and labour
density. The reduction in transport costs increases proximity and may lead to positive
externalities when firms locate close to other firms.
1 Introduction 9
There are, for example, economies of agglomeration resulting from a reduction in

commuting costs that induce a higher concentration of jobs in the centre. Increased
labour productivity associated with higher labour density increases productivity.
However, a sound appraisal requires the inclusion of any negative effects in the areas
where these workers come from. It is considered that for urban areas, it is more
likely that the positive effect dominates. In the case of intercity transport projects,
the cost of the periphery could exceed the benefits of agglomeration. The outcome
is context-specific, depending for example on land prices and the wage gap between
areas (see Duranton & Puga, 2004; Graham, 2007; Venables, 2007).
The Costs of Transport and the Consequences of Pricing Policies
The recovery of transport infrastructure costs does not follow a single pattern, with
differences between countries and by mode of transport. The discussion of whether
the short-term or the long-term is the appropriate time dimension for marginal cost
pricing necessarily leads to the question of whether users are willing to pay for
the capacity if the first alternative is chosen. The construction of new infrastructure
cannot be evaluated without solving the pricing question, as the benefits and costs
depend on the volume of demand and its composition.
In the production of any transport service, there are three types of costs: the
producer’s, the user’s, and the external cost. The decision on who pays and how
to pay these costs has far-reaching consequences on efficiency and equity. When
external costs are not internalized, the price of using polluting modes of transport or
generating high noise levels will be relatively more attractive. It may be decided that
it is the taxpayer who finances the construction of public infrastructure, in which case
the demand for the use of transport services using the infrastructure will increase.
The discussion about what prices should be charged for the use of transport infras-
tructures and services, which will determine how the three components of total costs
are allocated, remains one of the most controversial, and we can certainly say that
it is still far from being resolved. Looking at the three cost components and starting
with the external costs, we can see that it is not very difficult to internalize these
costs. The use of Pigouvian taxes is a way for prices to regain their role as signals
for the efficient allocation of resources. This also applies to the non-internalized part
of the user’s costs in the case of congestion.
Transport producer’s costs include costs of building, maintaining, and operating
the infrastructure, and other fixed and variable costs incurred by having a fleet of vehi-
cles in operation. For transport service companies operating in competitive markets,
prices will tend to marginal costs in the long-run. In the case of infrastructure, there
are differences. What price should be charged for the use of the road by a heavy
vehicle transporting goods? What price should a traveller pay for a HSR service?
Economists agree on marginal cost pricing, and if costs are not covered and there
are budgetary constraints, prices should deviate from marginal costs with the least
possible loss of efficiency.
10 1 Introduction
Should we recommend the use of short-run marginal cost or long-run marginal

cost? Here, the unanimity of economists disappears, and the complexity of transport
pricing problems with indivisibilities, sunk costs, long asset life, and economies of
scale appears in all its harshness.
In a world where actual infrastructure capacity will rarely be optimal, the decision
on whether to opt for short-run or long-run marginal cost pricing has far-reaching
economic consequences in terms of the modal distribution of traffic and who will
pay for transport costs. It is also argued that for certain modes of transport, such as
the metro or urban buses, fares should be lower than marginal cost and, not only as
a second-best policy to alleviate congestion and pollution problems but also as an
equity policy. Governments often deviate from marginal cost pricing, with arguments
based on equity criteria. Transport is a necessary service for all individuals, and the
supply of public transport services is essential, especially for low-income households.
Although equity is based on other principles, the economic analysis of projects
dealing with an equity problem can also help to choose the most efficient alternative
to achieve the same equity goal.
The content of this book is the following. Chapter 2 presents the analytical frame-
work for the social appraisal of any public intervention in transport. The analysis is
based on a simple model from which practical rules for the measurement of bene-
fits and costs are derived. Chapter 3 applies this methodology to the evaluation of
railway investments, evaluating a HSR project, a mode of transport which is charac-
terized by a high proportion of sunk costs and where the volume of demand, the time
saving and its value, and the modal split changes in the corridor are crucial for the
economic profitability of the project. Chapter 4 analyses the relationship between
pricing and investment and its effects on economic evaluation and public decisions
when there are different transport alternatives. Pricing affects demand and, hence,
social welfare. The social profitability of the project can be quite different depending
on the pricing policy. A particular charging scheme may favour the creation of a
specific transport infrastructure network, leading to irreversible long-term equilibria
that would not be optimal under other charging schemes. Finally, in Chap. 5, CBA
is applied to the evaluation of a transport policy. We analyse the efficiency of ad
valorem and specific subsidies for resident passengers in air transport markets. This
chapter shows the potential of the economic analysis to understand the consequences
of alternative options to achieve the same target and how this evaluation provides a
solid foundation for the selection of the best mechanism.
Chapter 2
Cost–Benefit Analysis of Transport
Projects: Theoretical Framework
and Practical Rules
2.1 Introduction
Transport improvements can be typically contemplated as exogenous interventions

in transport markets, which move the economy from one equilibrium to another,
commonly through the reduction of the generalized price (composed of monetary
price, time, and other disutility components) borne by transport users. Even projects
aimed to provide new capacity and, of course, transport policies such as subsidies
to passengers, can be analysed as a reduction in the generalized price of transport.
Although there are different reasons that, in principle, could justify these public
interventions (e.g., increasing accessibility, improving safety, decreasing congestion
and scarcity, or reducing negative environmental externalities), the question is not
whether there are social benefits from public intervention, but whether these potential
benefits are large enough to offset the opportunity cost of the resources diverted from
other uses to obtain those benefits. This is the challenge of the economic evaluation
of projects and policies, whose main objective is to assess changes in the well-being
of individuals directly or indirectly affected by their implementation.1
Social welfare changes can be approximated through the sum of the changes in the
surpluses of the agents affected by the project, or through the sum of the changes in
willingness to pay (WTP) and in the use of real resources, ignoring income transfers.
The measurement of the effect of a reduction in the generalized price of transport
is different in the case of a unimodal or multimodal analysis. This chapter follows
Mohring (1971, 1993) and covers alternative ways of dealing with the economic
evaluation of transport projects, explaining the rationale of the different options.
Although the alternative methods aimed to measure the change in social welfare are
equivalent, when practical rules are not supported by a robust theoretical framework,
there is a risk of underestimation or overestimation of the net social benefits of
projects due to omissions or double counting.
1 This chapter is based on de Rus et al. (2022).

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 11
G. de Rus et al., Economic Evaluation of Transport Projects,
https://doi.org/10.1007/978-3-031-35959-0_2
12 2 Cost–Benefit Analysis of Transport Projects: Theoretical Framework …
The cost–benefit analysis (CBA) of transport projects is commonly conducted

using a few measurement rules that are simply obtained from changes in prices and
quantities of the derived demand for transport. We follow the theoretical frame-
work developed by Johansson (1993) and Johansson & Kriström (2016), and for
the measurement of the effects of transport projects, we follow Johansson & de Rus
(2018) and de Rus & Johansson (2019). This chapter develops a model that includes
the explicit consideration of time in the generalized prices of goods and services,
and the corresponding budget constraint given the time endowment of the individual,
with the emphasis on the rigorous derivation of the CBA rules.
There are other economic impacts linked to the response of the private sector
to changes in proximity, and these effects could be significant in specific contexts
affecting productivity effects and land development. Nevertheless, the main compo-
nents of transport projects are those accruing to users, and only when prices deviate
from marginal costs in secondary markets, other benefits not fully internalized like
agglomeration economies should be considered (Laird & Venables, 2017; Mackie
et al., 2011). Although the chapter also briefly discusses these project effects, the
main target is the analysis of the alternative ways to deal with the CBA of public
interventions and the derivation of consistent rules for the practical assessment of
projects.
Although we follow the conventional CBA methodology, the analysis in this
chapter is based on the model presented in Sect. 2.2, which aims to derive the funda-
mentals of these measurement rules, explain their assumptions, and clarify the condi-
tions under which they hold. This helps to derive consistent criteria for project eval-
uation, avoiding pitfalls such as double counting. Section 2.3 discusses some CBA
rules and policy recommendations, as well as the equivalence between the aforemen-
tioned alternative approaches to project appraisal. In this context, the use and misuse
of shadow prices are also discussed, as well as a brief discussion of indirect effects
and the so-called wider economic benefits (WEBs). Prices affect demand and, thus,
the social surplus of transport investments. For this reason, in Sect. 2.4, we discuss
the relationship between pricing and investment. Finally, Sect. 2.5 summarizes the
main conclusions of this chapter.
2.2 Cost–Benefit Analysis of Transport Projects:

Theoretical Framework
2.2.1 A Basic Model to Measure Social Welfare Changes due

to Transport Projects
We assume an economy consisting of a representative individual, who has a contin-

uous and increasing utility function that depends on the amounts chosen within a
set of n consumption activities that includes all goods and services produced in this
economy, U(x 1 , …, x n ), where x j represents the quantity of good or service j, with
2.2 Cost–Benefit Analysis of Transport Projects: Theoretical Framework 13
j = 1, …, n. This individual chooses his optimal set of consumption activities by

maximizing his utility given his budget constraint. This constraint delimits all the
combinations of goods and services, including leisure, that may be obtained at any
given time, according to their (exogenous) market prices and individual’s income,
which has two components (wage and profits).
First, this individual earns income by working. Let us denote by l¯ the maximum
time endowment available for the consumer (e.g., 24 h per day, or 365 days per year),
and by t j the time required to consume each unit of good or service j.2 Denoting by w
the wage received per unit of working time, the individual’s labour income is given
by wl, where l represents the working time chosen by the individual, which is defined
by the difference:

n
l = l¯ − tjxj. (2.1)
j=1
Secondly, we will assume that all firms are ultimately owned by this representative
individual and that they distribute all their profits; thus, the individual’s total income
obtained as firm owner is given by:

n
= πj, (2.2)
j=1
where π j is the maximum profit obtained by firm j from producing and selling good
or service j. From each firm’s point of view, this profit is obtained by solving the
standard maximization program:

π j = max p j x sj − wl j = p j f j l j − wl j , (2.3)
lj
where p j is the market price of good or service j, and lj represents the amount of labour
(the only input in this model) used by firm j to produce x j s through the production
function f j (lj ). If all the required equilibrium properties hold, the first-order condition
of this problem is given by:

∂π j d f j l ∗j
= pj − w = 0, (2.4)
∂l j dl j
2 Everyday life activities are time-consuming, and this resource should be explicitly included in
the analysis because individuals make their travel decisions both in terms of market prices and the
opportunity cost of the travel time. This follows Becker (1965) or DeSerpa (1971) but also many
contributions in transport economics literature (see Jara-Díaz et al., 2016, for example).

and it allows us to obtain as a solution π j = p j f j l ∗j − wl ∗j . Note that, in this
equilibrium, the sum of all labour inputs used by firms
must be equal to the working
time offered by the representative individual, i.e., nj=1 l ∗j = l.
We can now use these results to finally define the individual’s budget constraint,
which is given by:

n
p j x j ≤ + wl, (2.5)
j=1
which can be also rewritten as:

⎛ ⎞

n
n
p j x j ≤ + w⎝¯l − t j x j ⎠,
j=1 j=1
that is equal to:

n
¯
g j x j ≤ + wl, (2.6)
j=1
where g j = p j + wt j represents the generalized price of good or service j. For

example, in the case of air transport, g includes the monetary price paid (e.g., the
airline fare, airport charges, etc.) and the users’ time cost (access and egress time,
waiting time and flight time).3
Since expressions (2.5) and (2.6) are equivalent, we can write individual’s budget
constraint either in terms of market prices, p = ( p1 , . . . , pn ), and individual’s
income y = + wl, or in terms of the generalized prices, g = (g1 , . . . , gn ), and
the potential maximum income (profits income plus the value of time endowment),
named here as generalized income y g = + wl. ¯
We can now solve the individual’s decision problem. If the utility function satisfies
the local non-satiation property, and the budget constraint is binding, the individual’s
maximization problem reduces to:
max U (x1 , . . . , xn )
x1 ,...,xn

n
s.t. p j x j = + wl, (2.7)
j=1
or, equivalently, in terms of generalized prices:
3 Price and value of travel time may not be the only relevant parameters affecting consumers’ travel
behaviour. When the overall conditions of transport services matter (in terms of comfort, reliability,
safety, etc.), some additional elements of utility should be added to the generalized price. For the
sake of simplicity, we omit these elements here, as the main results are unaffected.
max U (x1 , . . . , xn )
x1 ,...,xn

n
s.t. ¯
g j x j = + wl. (2.8)
j=1
This is the preferred expression of the problem when evaluating transport projects,
since most of them can be interpreted as changes in generalized prices (either due to
changes in market prices and/or in travel time). Note that if a transport project reduces
travel time, the individual will have more time to work (or for leisure), which in turn
may lead to the production of additional goods. The project costs are measured in
terms of the net monetary value of the goods that the individual has to give up to
implement such a project.
The opportunity cost of travel time is the wage rate (w) in our model. This is
a simplifying assumption that does not affect the main results.4 In practice, deter-
mining the value of time often becomes an empirical question since for some indi-
viduals (those who are willing to work, but unable to find a job), the wage rate could
overestimate the true opportunity cost of leisure, whereas for others, the wage rate
underestimates their non-working time (when other non-monetary benefits are asso-
ciated with the job). In practice, the value of travel time is usually denoted by vt j
(and not just wt j , as assumed for simplicity in our model).5
The corresponding Lagrange function used to solve problem (2.8) is then given
by:
⎛ ⎞
n
L = U (x1 , . . . , xn ) − λ⎝ g j x j − − wl¯⎠, (2.9)
j=1
which can be also rewritten as:

⎛ ⎞
n
n
n
L = U (x1 , . . . , xn ) − λ⎝ gjxj − p j f j (l ∗j ) − w t j x j ⎠. (2.10)
j=1 j=1 j=1
4 See Hensher (2011) for an overview of the major theoretical and empirical issues concerning the
value of travel time savings.
5 There are several reasons why the value of time may empirically differ from the wage rate. This is
the case when both work and travel affect utility directly (and not only the budget constraint, as in
our model), or when working time is unaltered by travel time savings. In those situations, the value
of time of each individual depends on the sort of travel they undertake, i.e., the time at which the
journey is made, the characteristics of the journey (congested, repetitive, or free flow), the journey
purpose (commuting or leisure), the journey length, the mode of transport, or the size of the time
saving (see Mackie et al., 2001, for further details).
First-order conditions are given by:
∂L ∂U (x ∗ )
= − λ g j − wt j = 0,
∂x j ∂x j
∂L n
= g j x ∗j − − wl¯ = 0, (2.11)
∂λ j=1

with j = 1, …, n and x ∗ = x1∗ , . . . , xn∗ .
The solution of the above maximization program yields the Marshallian demand
function for each good or service j, given by x ∗j = x j (g, y g ), with g = (g1 , . . . , gn )
representing the vector of all generalized prices, and the generalized income
y g = + wl, ¯ which is defined by the sum of profits income and the value of
individual’s time endowment.
When the individual is maximizing his utility, the opportunity cost of one hour
is the wage rate w, identified with the value of time in our model because, at
the optimum, the individual is indifferent between consuming additional goods,
including leisure, or working more (and giving up the corresponding units of time).
Hence, the hourly wage w, is the opportunity cost of time disregarding its final use
(either leisure or consumption). This is the key idea for the measurement of direct
benefits of transport improvements: reducing the time spent on transport activities
increases the time available for consumption of other goods, or for working. These
benefits imply an opportunity cost, measured in terms of the monetary value of the
other goods that the individual gives up when implementing the project.6
Figure 2.1 illustrates the relationship between the inverse demand function of a
transport service in terms of the market price or the generalized price. As explained
above, in our model, the demand function is the solution of the representative
consumer’s maximization program. In general, the market demand is the horizontal
sum of the demand of all individuals’ in the society. Thus, if x denotes the total
number of trips demanded in the market, the (negative) relationship between the
number of trips and the generalized price of transport services can also be inter-
preted as users’ WTP for them, in terms of the market prices and the value of travel
time.
By substituting all these demands in the (direct) utility function, we obtain the
individual’s indirect utility function, defined as:

U x1∗ , . . . , xn∗ = V (g, y g ), (2.12)
6Once the spatial nature of transport activities is included in the model, the explicit treatment of
changes in proximity and location could yield potential increases of productivity and the WEBs.
Thus, time savings (as measured in our model) would underestimate the social benefits of transport
projects (see Sect. 2.3.3).
p g
g
g0
g x
p p
p x) wt
x x
x x
x
x
Fig. 2.1 Transport demand function: market price versus generalized price
which gives the individual’s maximal attainable utility when faced with a vector g
of generalized prices and individual’s generalized income y g . This utility function
is called indirect because individuals usually think about their preferences in terms
of what they consume rather than in terms of prices and income.
In addition, note that by replacing the Marshallian demands into the Lagrange
function and considering first-order conditions, we have that, in equilibrium:
⎛ ⎞
n
L ∗ = V (g, y g ) − λ⎝ g j x ∗j − − wl¯⎠ = V (g, y g ), (2.13)
j=1
and therefore:
∂ L∗ ∂ V (g, y g )
= λ = V y = , (2.14)
∂ yg ∂ yg
showing that the Lagrange multiplier can be interpreted as the individual’s marginal
utility of generalized income (Vy ).
2.2.2 Measuring the Economic Effects of Transport Projects
Let us now analyse the effects of a transport project, defined as an exogenous inter-
vention that increases the number of trips, either via investments (e.g., an increase
in capacity) or other policies (such as more efficient pricing, better management
practices, etc.), and/or reduces the generalized price. In our representative individual
world, the change in social welfare, dW, is just given by the change in the individual’s
utility: dW = dU and, thus, considering the direct utility function evaluated at the
initial equilibrium, we can write:

n
∂U (x ∗ )
dW = dU = dx j . (2.15)
j=1
∂x j
Then, substituting the first-order condition of the individual’s maximization

program given by (2.11) into expression (2.15), we obtain:
dW n
n
= g j − wt j dx j = p j dx j . (2.16)
Vy j=1 j=1
According to this expression, the change in social welfare resulting from a trans-
port project that implies a marginal change in the number of trips is equal to the
difference between the individual’s generalized WTP for those additional trips and
the value of its travel time, i.e., the market price. Note that, if the transport project
has a cost, some dx j are negative, representing the monetary value of production and
consumption of other goods, including time, that the individual must give up for the
project to be implemented.
Alternatively, if we use the indirect utility function, we get:
n
∂V
dW = dV = dg j + Vy dy g . (2.17)
j=1
∂g j
Applying the envelope theorem, we obtain:
∂V
= −λx j = −Vy x j , (2.18)
∂g j
which can be replaced into expression (2.17) to finally obtain a useable expression
that allows us to evaluate the effects of transport projects:
dW n
=− x j dg j + dy g . (2.19)
Vy j=1
Leaving the assumption of a representative individual, the change in social welfare

is given by the sum of the change in each individual’s utility, weighted by the social
marginal utility of each individual. The value of the social marginal utility of income
can be assumed to be equal to one, only if income distribution is optimal, or society
has at its disposal means for unlimited and costless redistributions, and therefore,
monetary gains and losses can be aggregated across individuals in order to determine
whether the project is socially worthy. Nevertheless, redistribution is not costless
since, for example, it might affect incentives in a negative way. In this case, the actual
income distribution may not be far from the constrained optimal one. This means
that the actual situation represents a kind of constrained optimum and possibly we
can just sum gains and losses across individuals. This is also sufficient if relative
prices are left more or less unchanged (see Johansson & Kriström, 2016, for further
details on aggregation problems).
A Price Reduction Transport Project
Now consider that the change in the generalized price of good or service j which we
interpret as a transport project is only due to a change in the market price p j , while
the required (travel) time t j remains constant, i.e., dg j = d p j. In this case, we have:
n
∂π j n
dy g = d + wl¯ = dpj = x sj d p j . (2.20)
j=1
∂ p j j=1
By substituting this result into expression (2.19), and assuming that all product
markets clear, x j = x sj :
dW n n
=− xjdpj + x sj d p j = 0, (2.21)
Vy j=1 j=1
i.e., a marginal variation in the generalized price of good or service j due to a change
in the market price p j (with t j constant) does not produce any effect on welfare.
The reason is that, if all product and labour markets clear, a change in the market
price without any time saving is just a transfer between consumers and producers.
Moreover, there are no other additional welfare effects to be considered in the rest
of the economy.
A Time-Saving Transport Project
Alternatively, consider now that the change in the generalized price of good or service
j is due to a change in time t j while the market price p j remains constant, i.e.,
dg j = wdt j . In this case:
⎛ ⎞
n
∂π n ∂ f j l ∗j ∂l j
dy g = d + wl¯ = w⎝ p j − w⎠ dt j ,
j
w dt j = (2.22)
j=1
∂t j j=1
∂l j ∂t j
which is zero, according to the first-order condition of the profit maximization

program of firm j given by expression (2.4), i.e., dy g = 0. Then, by substituting this
into expression (2.19), we finally obtain that:
dW n
=− x j wdt j . (2.23)
Vy j=1
In other words, the increase in social welfare due to a marginal reduction in travel
time is equal to the value of the time savings (dt j < 0) multiplied by the number of
trips benefiting from that improvement.
Expressions (2.19) and (2.23) are derived by considering marginal changes with
respect to the situation without the project. When the effect of a transport project is
not marginal, the change in social welfare can be directly approached as the change
in consumer’s utility with the project with respect to the counterfactual. In our model,
this change in social welfare is, thus, given by:

W = V = V g 1 , y g1 − V g 0 , y g0 , (2.24)
where superscript 1 indicates the situation ‘with the project’ and superscript 0 denotes
‘without the project’. Thus, the social benefit of the project is expressed as the
difference in the individual’s utility with and without the project.
Although this utility is not directly measurable, expression (2.24) is very useful.
If the individual is asked how much money he is willing to pay to enjoy the benefits
derived from the reduction in the generalized price of transport due to the project,
we obtain a monetary measure of the change in his utility. This is the so-called
compensating variation (CV).7 When CV is taken from the individual’s income, he
is indifferent between the situation with and without the project, as expressed by:

V g 1 , y g1 − CV = V g 0 , y g0 . (2.25)
If the project implies costs, the CV does not only account for the benefits of the
project but also for the negative effects on utility derived from the diversion of goods
and labour from other uses (i.e., the cost of the project). Therefore, the CV represents
the change in the generalized WTP due to the project benefits minus the willingness
to accept for the goods and labour required by the project. The net social value of
the government intervention is then:
W = CV = WTP − Resources. (2.26)
Time savings, the main benefit in many transport projects, can be considered either
as an increase in the WTP or a positive change in resources. This is not important
although, given the position of a generalized demand curve (see Fig. 2.1), the decrease
in the generalized price of transport with the project increases the number of trips,
and thus a change in the WTP of this generated demand. For the existing demand,
the WTP (including time) has not changed, and thus, we can consider the value of
time savings as a (positive) change in resources.
7 Alternatively, if the individual is asked how much money he is willing to accept to waive the
potential benefits derived from the reduction in the generalized price of transport due to the project,
we also obtain a monetary measure of the change in his utility. This is the so-called equivalent
variation (EV). When EV is given to the individual as an additional
income, he is indifferent
between

the situation with and without the project, as expressed by: V g 1 , y g1 = V g 0 , y g0 + EV . If
income effects are zero, CV and EV coincide.
2.3 Practical Rules for Cost–Benefit Analysis 21
Suppose the representative individual is asked for his WTP for the transport project
disregarding any effects on his profits income. Then, the maximum WTP, CV, as
defined in expression (2.25), and the new partial one, denoted by CVP are given by:
CV = CV P + PS, (2.27)
where PS represents the change in firms’ profits due to the transport project. If
income effects are not significant, CVP can be approximated through the change in
consumer’s surplus (CS),8 and then:
W = CV ≈ CS + PS, (2.28)
i.e., social welfare changes can be approximated through the sum of the changes in
the surpluses of consumers and producers.
2.3 Practical Rules for Cost–Benefit Analysis
So far, we have described the foundations of the two main approaches to measure the
net benefits of transport projects: adding the changes in WTP and the use of resources
or adding the changes in consumers’ and producers’ surpluses. However, expressions
(2.24) to (2.28) can be generalized to include other roles of the individual in the
society. A practical disaggregation is to consider three owners of production factors:
first, the ‘owners of capital’ (O), generally called producers, who have a variety
of equipment, infrastructure and facilities where goods and services are produced;
second, the ‘owners of labour’ (L) including for simplicity employees of different
skills and productivity levels, and the ‘landowners’ (R).
The fixed factor ‘land’ is restricted here to soil for agriculture or land for residen-
tial or productive uses. We differentiate the landowners from the common property of
natural and environmental resources (also called ‘natural capital’). Natural and envi-
ronmental resources such as climate, water, air, flora and fauna and landscapes, which
may be affected by projects, are included in ‘rest of society’(E). Adding consumers
(C) and taxpayers (G), six roles for the representative individual are identified for
evaluation purposes (de Rus, 2021a). The rationale for this disaggregation is both
for minimizing the risk of double counting and for equity considerations.9
8 The relative error of using the change in consumer’s surplus instead of CVP is low if the elasticity
of demand with respect to income, or the proportion of the change in consumer’s surplus with
respect to income, is small enough (Willig, 1976).
9 Important practical issues arise if capital or land is under foreign ownership (see Johansson & de
Rus, 2019). Our analysis assumes a closed economy.

Following Johansson (1993), the individual’s indirect utility function is now

given by V (p, t, w, , τ, z), where p = (p1 , …, pn ) is the vector of market prices,
t = (t 1 , …, t n ) is the vector of the time required for consuming each good or service,
w is the wage, is firms’ profits, τ is a lump-sum tax, and z represents a set of
natural resources.
In this setup, the change in social welfare due to a transport project (which implies
a reduction in transport generalized price) is given by:

W = V = V p 1 , t 1 , w1 , 1 , τ 1 , z 1 − V p 0 , t 0 , w0 , 0 , τ 0 , z 0 , (2.29)
and using the concept of CV, we have that:

V p 1 , t 1 , w1 , 1 , τ 1 , z 1 − CV = V p 0 , t 0 , w0 , 0 , τ 0 , z 0 , (2.30)
with:
CV = CV P + OS + LS + RS + GS + ES, (2.31)
where CVP can be approximated by changes in consumers’ surplus; OS is the

change in firm’s revenues minus variable costs; LS refers to the change in workers’
surplus; and RS is the landowners’ surplus, equal to the wage and land income,
respectively, minus the minimum payment they are willing to accept for the use of
the factor, i.e., its private opportunity cost; GS is the change in taxpayers’ surplus,
equals tax revenues minus public expenditure; and ES is the change in the surplus of
the rest of society, i.e., the value of the externality minus the compensations received
(if any).
Finally, adding the changes in surpluses, the income transfers net out, and it is
easy to show that the result is again equal to the change in WTP minus (plus) the
value of the diverted (saved) goods and labour from other uses and the negative (or
positive) external effects:10
W = CS + OS + LS + RS + GS + ES = WTP − Resources.

(2.32)
2.3.1 Guidelines for the Measurement of the Direct Effects
For the sake of simplicity, consider a transport project without investment costs. The
change in welfare with the project is measured with g(x), the market inverse derived
demand function for a transport activity in terms of its generalized price. The initial
10 Notice that an external effect is a change in resources.

equilibrium is (g 0 , x 0 ), and marginal operating costs are constant and equal to c.

With the project, the generalized price of transport is reduced to g 1 , and the number
of trips increases to x 1 .
Once the benefits and costs of the project are identified, the practitioner has to
choose one of the available alternative approaches for the measurement of those costs
and benefits. A clear understanding of the chosen method avoids common errors that
may lead to the overestimation or underestimation of the net benefit.11
Adding the change in surpluses (expression 2.32) is straightforward and provides
more information, but it is difficult to be applied in practice given the data usually
available and the difficulty of the ex-ante identification of the final beneficiaries. The
alternative consists in identifying and measuring the changes in WTP and resources,
and though it seems, at first sight, easier, it has some pitfalls associated with its use.
CBA guidelines usually present a single graph for the transport mode directly
affected by the project, showing the change in the generalized price and quantities,
decomposed in benefits for the existing demand and for deviated and generated
demand. The analysis may look multimodal when deviated demand is included but
in practice is prone to errors when price deviates from marginal cost in other modes
or activities where generated demand comes from.
One easy way to proceed when in other affected parts of the transport system
prices are not equal to marginal social costs is to consider a unique corridor where
all transport alternatives operate and then add the changes in the surpluses of all
the affected agents (expression 2.32) and modes. Alternatively, using the change
in WTP and resources, the corridor assumption is very helpful in the presence of
taxes or market power. In a corridor between A and B, there is no change in WTP
(no change in quality is assumed for simplicity) because the WTP depends on the
purpose of the trip and it is not necessarily affected by the change of route, time,
or mode under the assumption of constant quality (transport is commonly a derived
demand).
Therefore, the change from g 0 to g 1 only translates into the use of new resources
absorbed by the project and the saving (substitutes) and consumption (complements)
of additional resources in the rest of the modes affected within the corridor. This is
even so in the case of generated demand coming from other consumption activities
(and, hence, these activities need to be included in our corridor). In the initial equi-
librium, the marginal unit of generated demand was indifferent between travelling
and the other consumption activities, so the treatment is identical to any transport
mode. As the effects in many secondary markets can be of different signs and many
of them are simple relocation, the sensible way to proceed is to follow the corridor
(or multimodal) analysis including some reasonable assumptions based on the best
information available on the source of the generated demand coming outside the
transport market.
11There are all sorts of measurement/prediction errors, which apply to both methods (Mackie &
Preston, 1998).
Hence, we can summarize the two alternative approaches: the first one, adding the
surpluses of all the agents involved in all transport modes, and some other economic
activities affected by the project. Nevertheless, when the price is equal to marginal
cost in the rest of the economy, it is correct to concentrate only on the mode directly
affected by the change in the generalized price, disregarding intermodal effects.
When the practitioner decides to follow the change in WTP and resources, ignoring
transfers, there are two options: (i) the conventional single graph analysis, common
to many CBA guidelines, where the WTP is constant for existing users (assuming
quality to be constant) but there is an increase in WTP of deviated and generated
demand. In this case, we have to add any distortion (e.g., loss of profits or taxes) in the
other modes and economic activities affected by the change in the primary market.
In this case, it is incorrect to include the change in resources used or saved in the
secondary markets. Moreover, if the practitioner ignores the effects due to taxes and
market power in the other modes and economic activities, there is a measurement
error. (ii) The corridor analysis, where the change in WTP is limited to any change
in quality or safety and only changes in resources are accounted for. In this case,
the practitioner should include any change in resources used or saved in the original
transport mode and any other mode or economic activity included in the corridor.
Let us formally prove the equivalence of the different approaches. Consider a
market with n modes of transport or activities, where a transport project reduces
the generalized price of mode i (gi1 < gi0 ) because of a reduction in travel time
(ti1 < ti0 ). Travel time includes access, waiting, in-vehicle, and egress time. Note that,
although there is a reduction in generalized price, it is possible to charge a higher price
( pi1 > pi0 ), though it must be lower than the reduction in the value of the time
component. Let us denote by vi the value of time of users initially travelling in mode
i, by ci the constant marginal operating cost of mode i (assumed to be different with
the project), and by τi the value of an ad valorem tax applied to mode i. Notice
that, since there is an ad valorem tax, the price charged by producers ( pi− ) does not
coincide with the price paid by users ( pi ), where pi = pi− (1 + τi ).
We assume that the value of time for users initially choosing an alternative mode
or activity j (v j ) is different than the value of time for users initially travelling in
mode i (vi );12 there are ad valorem taxes in all the alternatives (τ j ), so the price
charged by producers ( p −j ) does not coincide with the price paid by users ( p j ),

where p j = p −j 1 + τ j ; and marginal operating cost is constant in each alternative
mode or activity (c j ), with j = 1, . . . , n and j = i. We also assume that alternative
j generates an externality equal to E per passenger-trip. Finally, income effects are
not significant.
According to expression (2.32), the change in social welfare is the sum of the
changes in surpluses of all the agents affected in all transport modes and in other
economic activities, affected by the project, which can be easily calculated using
the standard assumption of a linear approximation between the initial and the final
12Notice that in this section, we use the parameter v to denote the value of time since, as already
mentioned, it may empirically differ from the wage rate.
generalized prices (the so-called ‘rule of a half’).13 We distinguish between existing

demand (users already travelling in mode i), deviated demand (users changing from
an alternative mode with the project), and generated demand (coming from other
consumption activities). We follow the same procedure for deviated and generated
demand since the former comes from other modes and the latter comes from other
activities. Using the superscripts e and d to denote changes due to existing demand,
and deviated and generated demand from mode or activity j, respectively, the transport
project implies a change in social welfare given by:

n
W = W e + W jd . (2.33)
j=1
j=i
For existing demand (xi0 ), the benefits of the project come from the change in
consumer’s surplus of existing users, change in firm’s revenues minus variable costs
in this traffic, and change in tax revenues (because of the price increase):14

CSe = gi0 − gi1 xi0 = pi0 + vi ti0 xi0 − pi1 + vi ti1 xi0 , (2.34)

OSe = pi1− − pi0− xi0 − (ci1 − ci0 )xi0 , (2.35)

GSe = τi pi1− − pi0− xi0 , (2.36)
ESe = 0. (2.37)
Hence, the change in social welfare due to the existing demand is given by:
W e = CSe + OSe + GSe + ESe = vi (ti0 − ti1 )xi0 − (ci1 − ci0 )xi0 . (2.38)
In the case of deviated demand from mode or activity j, g 0j = p j + v j t 0j denotes

the generalized price for the user indifferent between mode or activity j and mode
i without the project, where t 0j denotes the travel time of such an indifferent user.
Notice that in the initial equilibrium, g 0j has to be equal to gi0d = pi0 + v j ti0 (i.e.,
without the project, the indifferent user has the same generalized price in mode or
alternative j, g 0j , and in conventional train, gi0d ). All those users with generalized
price in mode or activity j higher than the generalized price of the indifferent user
g 0j = gi0d had chosen mode i instead of this alternative. On the contrary, all those
users with generalized price in mode or activity j lower than the generalized price
13 See Harberger (1965), Neuberger (1971) and Small (1999).

14 We assume no change in workers’ surplus nor landowners’ surplus.
of the indifferent user g 0j = gi0d had chosen mode or alternative j instead of mode
i. Once the project is implemented, the generalized price in mode i is reduced to
gi1d = pi1 + v j ti1 and, due to this reduction, some users that preferred mode or
activity j before the project now prefer mode i. Thus, x dj represents the deviated
demand from mode or activity j to mode i, and total demand with the project (xi1 ) is
equal to xi + nj=1 x dj . Now, there is a new indifferent consumer, and his generalized
0
j=i
price in the alternative is g 1j = p j + v j t 1j , where t 1j denotes the travel time of this
new indifferent consumer once the project has been implemented. Notice that t 1j is
different than t 0j since, for example, consumers have different access or egress time.
Finally, similarly to the former indifferent user, in the final equilibrium, g 1j has to be
equal to gi1d = pi1 + v j ti1 for the new one.
Adding the change in surpluses for deviated demand, the benefits of the project
come from the change in consumers’ surplus of the deviated users from mode or
activity j (linear approximation), change in firm’s revenues minus variable costs
(firms i and j), change in collected taxes, and change in the surplus of the rest of
society (equal to the value of the externality as, for simplicity, compensations are
assumed to be zero).
1 0 1
CSdj = g j − gi1d x dj = p j + v j t 0j − pi1 + v j ti1 x dj , (2.39)
2 2

OSdj = pi1− − p −j x dj − (ci1 − c j )x dj , (2.40)
GSdj = τi pi1− x dj − τ j p −j x dj , (2.41)
ESdj = −E x dj . (2.42)
Hence, the change in social welfare due to the deviated demand from mode or
activity j is:
W jd = CSdj + OSdj + GSdj + ESdj

1 1
= v j t 0j − ti1 x dj + ( pi1 − p j )x dj − (ci1 − c j )x dj − E x dj . (2.43)
2 2
Finally, following the change in surpluses approach, the change in social welfare
for the whole demand, adding (2.38) and (2.43), is:

n
W = W e + W jd
j=1
j=i
= vi (ti0 − ti1 )xi0 − (ci1 − ci0 )xi0

n
1 0 1 1
+ v j t j − ti x j + ( pi − p j )x j − (ci − c j )x j − E x j .
1 d d 1 d d
(2.44)
j=1
2 2
j=i
Adding the changes in WTP and resources following the unimodal or single graph
analysis, the change in social welfare is equal to the change in WTP and the change
in resources. First, for the existing demand, the change in WTP (WTPe ) is zero,
and the change in resources (Resourcese ) is equal to the value of the time invested
(saved in our project because ti1 < ti0 ) and the change in operating cost of existing
trips:

W e = WTPe − Resourcese = −vi ti1 − ti0 xi0 − (ci1 − ci0 )xi0 . (2.45)
It is immediate to check that Eqs. (2.38) and (2.45) coincide.

Second, the change in WTP and the change in resources due to the deviated
demand from mode or activity j are equal to:
1 0
WTPdj − Resourcesdj = g j + gi1d x dj − v j ti1 x dj − ci1 x dj − E x dj . (2.46)
2
Expression (2.46) shows the difference between the increase in the users’ WTP for
the new trips (WTPdj , deviated from mode or activity j) and the resources required
to obtain those benefits (Resourcesdj ), i.e., the value of the time spent on the new
trips and the operating cost of the new trips. Notice that expression (2.46) does not
coincide with the change in social welfare (W jd ) given by expression (2.43). There
is a measurement error because the practitioner is ignoring the effects due to taxes
in the other modes or economic activities. Adding such effects, the change in social
welfare due to the deviated demand is given by:
1 0
W jd = g j + gi1d x dj − v j ti1 x dj − ci1 x dj − E x dj − τ j p −j x dj
2
1
= g 0j + gi1d x dj − v j ti1 x dj − ci1 x dj − E x dj − p j − c j x dj
2
1
= p j + v j t 0j + pi1 + v j ti1 x dj − v j ti1 x dj − ci1 x dj − E x dj − p j x dj + c j x dj
2
1 1
= v j t 0j − ti1 x dj + ( pi1 − p j )x dj − (ci1 − c j )x dj − E x dj , (2.47)
2 2
which is equal to expression (2.43).
At this point, we would like to highlight the importance of having a theoretical
model as a reference for practical CBA, avoiding the mechanical application of rules
of thumb from different sources that imply double counting and measurement errors.
Finally, the change in social welfare for the whole demand, adding (2.45) and
(2.47), is:

n
W = W e + W jd
j=1
j=i

= −vi ti1 − ti0 xi0 − (ci1 − ci0 )xi0
n
1 0 1 1
+ v j t j − ti x j + ( pi − p j )x j − (ci − c j )x j − E x j ,
1 d d 1 d d
(2.48)
j=1
2 2
j=i
which is equal to expression (2.44).

Alternatively, we may add the changes in WTP and resources following the multi-
modal or the corridor analysis. The change in social welfare is equal to the saved
operating cost plus time savings. No change in WTP occurs within the corridor as,
by assumption, the modal change does not affect the quality of travel. For existing
demand, the change in social welfare following the multimodal or the corridor
analysis is given by:
W e = Resourcese = (ci0 − ci1 )xi0 + vi (ti0 − ti1 )xi0 , (2.49)
that is equal to (2.38) and (2.45).

For deviated demand, to calculate the change in social surplus, we have to take
into account the cost and time saved in the alternative mode or activity j, and the cost
and time spent in mode i. In other words, we must compute the cost and time saved
by deviated demand shifting from alternative mode or activity j to mode i. Finally,
we have to consider the externality.
Regarding the time saved by each consumer shifting from alternative j to mode i, it
should be highlighted that time savings are not the same for everyone who deviated
from the alternative mode. Time savings for the indifferent consumer without the
project are the highest and equal to v j (t 0j − ti1 ), while time savings for the new
indifferent consumer with the project are the lowest and equal to v j (t 1j − ti1 ). Time

savings are given by 21 v j (t 0j − ti1 ) + (t 1j − ti1 ) x dj . Moreover, time savings could be
also computed as:
1 0
g j − p j − gi1d − pi1 + g 1j − p j − gi1d − pi1 x dj
2
1
= v j (t 0j − ti1 ) + (t 1j − ti1 ) x dj . (2.50)
2
Thus, adding cost saving and externalities, the change in social welfare is:
W jd = Resourcesdj
1 1
= v j (t 0j − ti1 )x dj + (t 1j − ti1 )x dj + (c0j − ci1 )x dj − E x dj . (2.51)
2 2
Recall that for the new indifferent user the generalized price is g 1j and equal to
gi1d .Therefore, we can rewrite expression (2.50) as:15
1 0
g j − p j − gi1d − pi1 + gi1d − p j − gi1d − pi1 x dj
2
1 1
= v j (t 0j − ti1 )x dj + ( pi1 − p j )x dj . (2.52)
2 2
Thus, adding cost saving and externalities, the change in social welfare given by
expression (2.51) could be rewritten as:16
W jd = Resourcesdj
1 1
= v j (t 0j − ti1 )x dj + ( pi1 − p j )x dj + (c0j − ci1 )x dj − E x dj , (2.53)
2 2
that is equal to (2.43) and (2.47).
Finally, the change in social welfare for the whole demand, adding (2.49) and
(2.53), is:

n
W = W e + W jd
j=1
j=i
= (ci0 − ci1 )xi0 + vi (ti0 − ti1 )xi0

n
1 0 1 1
+ v j t j − ti x j + ( pi − p j )x j + (c j − ci )x j − E x j ,
1 d d 0 1 d d
(2.54)
j=1
2 2
j=i
which is equal to expression (2.44) and (2.48).

Finally, it is worth highlighting that the distinction between the surpluses of
different agents in expression (2.31) and (2.32) shows the difficulty of identifying ex-
ante the final beneficiaries of the transport improvement. The explicit consideration
15 Notice that, since g 0j = gi0d , time savings given by expression (2.50) may be also expressed as:
2 v j (ti − ti )x j + 2 [( pi − p j ) + ( pi − p j )]x j .
1 0 1 d 1 0 1 d

16 It is common to consider that time savings of deviated demand are given by 1 v t 0 − t 1 , but
2 j j i
this is only the case if p j = pi1 .
of a fixed factor (such as land) in the social surplus expression may help in the under-
standing of one of the main sources of double counting in transport project appraisal,
helping also to clarify the distribution of the social surplus. It is well known that
land can capitalize most of the benefits of transport improvements. In the case of
an infinitely elastic supply of homogeneous workers, the surplus of each group in
expression (2.32), taxpayers’ surplus excepted, would be zero, and the landowners
would take the total surplus through higher land prices.
Furthermore, Collier & Venables (2018) have shown that with heterogeneity, both
in labour productivity and demand for housing, workers can gain a significant part of
the surplus. The implication for the economic evaluation of transport improvements
is that although a project increased the land value around the locations affected by
the improvement, only in some extreme cases, this increase would reflect the total
benefits of the projects because a share of those benefits is captured by workers. This
leads to a practical conclusion: it is easier to calculate the change in WTP and the
change in resources than to know who finally get the surplus.
Thus, the conclusion that transport benefits could be measured in a competitive
land market when this market is not affected by bubbles and speculation or any other
exogenous factors only holds under some restrictive conditions. What is true, in any
case, is that the practitioner should be very careful avoiding the combined use of the
three possible approaches: change in surpluses, change in WTP and resources, or the
increase in land prices.
2.3.2 Rules for the Use of Shadow Prices
The social benefits achieved through the reduction of the generalized price of trans-
port are not free. These benefits have an opportunity cost that is measured by the
value of resources diverted from other uses to the project. This section deals with the
inputs needed for the transport project and how to value them.17
The effects of a transport project on social welfare can be expressed as the
maximum income the affected individuals are willing to pay to enjoy the corre-
sponding benefits, net of the project costs. This is the value of the sum of the CVs as
in the left-hand side of expression (2.32) for all the individuals of the society, which
is net of project costs. The aggregation of the CV is then the sum of the individuals’
WTP for the benefits of the project (positive sign) and the willingness to accept for
giving up other goods to achieve those benefits (negative sign). This net value is
approached with the right-hand side of expression (2.32).
Thus, the social opportunity cost of the project (C j ) can be defined as the value
of all the goods the society has to give up when those resources are deviated from
other uses to implement the project, i.e., to enjoy the utility of good j (e.g., a faster
transport service), as formally represented by:
17See Johansson (1993) and de Rus (2021a). In particular, the section deals with inputs that can be
purchased in markets. Non-market resources are not discussed here.

s
Cj = pk dxk , (2.55)
k=1
an expression derived from the model in Sect. 2.2.1, with s ≤ n goods or services,
and where the only input, labour, is fully utilized to produce and consume goods and
assuming that market prices reflect the value of the goods deviated to the project.
The problem is that this expression is not very useful for computing the net social
benefit of a project. The practitioner generally does not know which goods (schools,
housing, leisure facilities, etc.) the society gives up to achieve the benefits of the
project under assessment. However, there is a way to circumvent this problem. To
do so, we now consider that the production of any of the goods in this expression,
xk , requires labour, and the corresponding production function is then given by:
xk = f k (lk ), (2.56)
whose differential shows that any output variation depends on the change in the
quantity of the input multiplied by its marginal productivity:
d f k (lk )
dxk = dlk . (2.57)
dlk
Replacing expression (2.57) in (2.55) and recalling that any profit maximizing firm
uses additional units of input until its market price equals the value of its marginal
productivity, w = pk d fdlk (lk k ) (see expression 2.4 in Sect. 2.2.1), the cost of the project
can be expressed as:

s
Cj = wdlk . (2.58)
k=1
The cost of the project initially expressed in (2.55) as the social value of the
diverted goods, to get the good provided by the project appears now in (2.58) as the
quantity of labour required to produce those goods, dlk , multiplied by the price of
labour, w.
In practice, the validity and usefulness of expression (2.58) for identifying and
calculating the costs of a project are conditioned by three underlying assumptions.
Firstly, all the changes in input markets (in our case, labour market) are marginal;
secondly, input markets are perfectly competitive, without distortions (such as indi-
rect or income taxes); and thirdly, all the resources are fully utilized. Nevertheless,
once these assumptions are abandoned to deal with more realistic project assessment
situations (that include, among others, the presence of subsidies or taxes, or the use
of unemployed labour in the project), expression (2.58) is no longer valid to calculate
the opportunity cost of the project. This is what shadow pricing is about: adjusting
market prices to reflect the true opportunity cost; and beware that this adjustment
only applies in the change in WTP and resources approach.
Recall that in our model, we are considering that there is only one input: labour.
Although in actual projects, there may be more inputs (a transport project typically
requires the use of some produced goods, such as vehicles, energy, spare parts, and
other materials),18 the analysis of the shadow price of labour is virtually the same
as the one applied to other inputs. Therefore, we will restrict our discussion to the
shadow price of labour.
Labour is required in the design and construction of transport infrastructure, in
its maintenance and operation, and in the provision of transport services using that
infrastructure. The opportunity cost of labour in expression (2.58) is valued at its
market price, w, but again this is only valid under several restrictive assumptions that
usually do not hold in actual project assessments, particularly with unemployment.
Thus, once the amount of labour required for the project is known, the next step
is to identify where this input comes from. Suppose now that we refer to labour as
the number of workers required for the project. In the analysis of the shadow price
of labour, it is advisable to distinguish three main possible sources of the labour
demanded by a project: (a) workers already employed in other productive activities;
(b) voluntarily unemployed at the current wage; and (c) involuntarily unemployed,
willing to work at the current wage.
We will assume that the project will have a significant effect on the demand for
labour and that there is a proportional income tax, τ w . Initially, without the project,
the labour market is in equilibrium with the supply (S) and demand (D0 ) determining
a wage rate of w0 and a quantity of labour of L 0 . The existence of a proportional
income tax (τ w ) introduces a distinction between the market supply function (S) and
the opportunity cost of the labour supplier, S(1 − τ w ). The function S(1 − τ w ) shows
the marginal value of leisure of the workers and the demand function is the value of
the marginal productivity of labour for the firm. At the equilibrium wage rate (w0 ),
the value of the marginal productivity of labour for the firm is equal to the value of
leisure for the marginal worker plus the income tax.
With the project, the demand for labour shifts from D0 to D1 , the wage rate goes
up to w1 , and the private demand for labour goes down until w1 is equal to the value of
the marginal productivity of labour. The increase in the wage rate has also the effect
of increasing the number of workers willing to work at this higher wage rate, and the
equilibrium number of workers goes up. Now, we can calculate the opportunity cost
of labour. The project needs L units of labour. This quantity of labour required by
the project has two components: new workers (L n ) that are willing to work at the

new equilibrium wage, and workers already employed in the private sector L p ,
who shift to the project at the higher wage w1 . The opportunity cost of previously
voluntarily unemployed workers (L n ) is the value of leisure forgone when they
accept the new jobs. They are paid w1 (1 − τ w )L n , and their social opportunity cost
is:
18 Note that the distinction between goods and inputs is somehow blurred in practice as the inputs to
be purchased for the project are indeed produced inputs (i.e., goods). Nevertheless, the distinction
is useful for the discussion of the shadow price of inputs when those inputs deviate from the private
sector.
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THE REAR SIDE OF THE MAIN FRONT.
On the left: Entrance to the Cloister.
The façade of Saint-Jean-des-Vignes after the bombardments.
Previously, in 1870, the façade of the church had been badly

damaged. The German shells set fire to a store of hay housed under
the porches, the splays of which were destroyed (p. 46).
In 1914, it suffered fresh injury, both spires being struck by shells.
The south tower lost its upper part, the remaining portion being torn
open at the base. The other tower was badly indented near its point,
while the carvings of the buttresses were injured. The whole façade
was moreover pitted by shell-splinters.
The damage caused in 1918 was considerably greater. In some
places the stone-work of the portals and towers was entirely
destroyed, and in others indented more or less deeply. The fine and
delicate carvings of the towers were also smashed. The north tower
suffered most. A breach, jeopardizing its stability, was made almost
the whole way up, and the upper part of the spire fell to the ground,
like the other spire had done four years before. The interior vaulting
which connected the two towers, partially fell in.
At the back of the façade (photo above) which was also struck in
several places, there are still traces of the first bay of the old nave of
the abbey-church, pulled down under the Empire.
WESTERN GALLERY OF THE CLOISTER.
Seen from Doorway. Nov. 1918.
The Great Cloister of Saint-Jean-des-Vignes.
Under the south portal stands a 13th century doorway, with vaulting
and tympanums decorated with finely carved foliage, which led from
the abbey-church to the great cloister.
Of the great 14th century cloister, only the south and west galleries
remain. Each has seven bays with pointed arches resting, on one
side, on brackets ornamented with foliage or human figures, and on
the other, on piers surrounded by small columns (photos above and
below).
The large arches in tierce-point, ornamented with fine mouldings and
separated by highly-wrought buttresses, formed an inner arcade
composed of two bays surmounted by a rose-window. Traces of it
are left in three bays of the south gallery (photo below). The arches
formerly contained windows.
SOUTHERN GALLERY OF THE CLOISTER, NOV. 1918.

INTERIOR OF THE SOUTHERN GALLERY, NOV. 1918.
The cloister, especially the south end, was often struck by German
shells, one piercing the vaulting of a bay, another damaging the
carvings of the exterior buttresses.
The Refectory.
The refectory (photo below), erected at the end of the 13th century,
was spoiled after the Revolution by its conversion to military uses.
REAR SIDE OF THE FAÇADE, CLOISTER AND REFECTORY,
NOV. 1918.
WESTERN GALLERY OF THE CLOISTER AND THE
REFECTORY.
The refectory, over 130 feet in length, contains two naves with
pointed vaulting. The pointed arches rest on fine columns with foliate
capitals, which are buttressed outside by piers engaged in the stone-
work. Like all monastery refectories, it has a raised and vaulted
platform, from which one of the monks read aloud during meals.
The refectory, used as a store-house, is divided into two stories by a
floor which runs below the capitals of the columns.
Outside the refectory, on the side next the cloister, were six large
rose-windows, since transformed into small rectangular windows,
and on the west front, eight tierce-point windows, now blocked up.
At the base of the loft-roof, set at intervals, are dormer-windows,
whereof one Renaissance.
The roof, damaged in places, was completely destroyed by the
bombardments over several of the bays. A large breach, already
repaired, was made in the end bay on the east side. One buttress
was destroyed and the adjacent part of the framework of one of the
rose-windows broken (photo above).
The great cloister communicated on the east with a small cloister,
rebuilt about 1550 in Renaissance style, of which several bays of the
south gallery remain standing.
Lastly, on this side of the façade of the church, to the east, is a
building, re-erected in the 16th century for the Abbot’s residence, but
which has been completely disfigured by its adaptation for military
purposes. It is flanked by an octagonal turret containing a staircase.
On leaving the Abbey, take the Rue Saint-Jean on the right, as far as
the Place Dauphine, in which is the Sous-Préfecture, housed in a
mansion built at the beginning of the 19th century. It was struck by
numerous shells.
THE RUE DES MINIMES.
Take on the left the Rue de Panleu which runs alongside the
buildings of the old Grand Séminaire (late 17th century), whose
18th century chapel is decorated with beautiful painted and gilded
woodwork, greatly damaged.
Many shells fell on the Grand Séminaire, causing serious damage. A
great part of the roofing was destroyed and in places large openings
were torn in the walls.
At the north-west end of the park of the Grand Séminaire,
excavations made in the 19th century, now filled in, uncovered the
remains of a Roman amphitheatre. These remains indicated a
theatre of very large dimensions, measuring about 470 feet across
its greatest width, while the theatre at Orange measures little over
300 feet.
Return to the Cathedral via the Rue de la Buerie, a continuation of
the Rue de Panleu. On the right is the Rue des Minimes with its
burnt houses (photo above).
THE CATHEDRAL QUARTER IN 1917.

In the background: the Cathedral Tower still standing.
FIRST ITINERARY—VISIT TO THE
SURROUNDINGS
Place de la Cathédrale.
The following itinerary includes the defensive works of Saint-Crépin-

en-Chaye and Le Mail, the first French and German lines from Pasly
to Saint-Paul, and the bridge-head on the right bank of the Aisne, in
front of the Faubourg Saint-Waast.
Starting from the Cathedral, follow the streets indicated by

continuous lines in the direction of the arrows.
The numbers indicate the pages where the corresponding
photographs will be found.
Follow the Rue de la Buerie to the Rue Saint-Christophe, which take
to the left as far as the place Saint-Christophe. To the north of this
square take the Boulevard Pasteur, follow its continuation (a narrow
road) which leads direct to the Château de Saint-Crépin-en-Chaye
(see outline map, p. 52).
Numerous defensive works surrounded this chateau and the farm
belonging to it. These buildings, now entirely in ruins, occupied the
site of an abbey founded in the 12th century.
On the left: ruins of farm and bomb-proof shelter;

on the right: trench leading to the Château seen in the
background through the trees.
THE MAIL BEFORE THE WAR.
After visiting Saint-Crépin, take the road (V.O. 15), along which ran
strong defence-works and which leads to the Promenade du Mail.
Follow the promenade towards the town as far as Pont-Neuf.
The Promenade du Mail, extending from the Hôtel-de-Ville to
Vauxrot, contained a trench throughout its entire length which led to
the front lines in the northern sector.
The Mail, bordered by the river Aisne and planted with century-old
trees, dates from the 17th and 18th centuries, and before the War
was one of the finest public gardens in France.
It was completely spoilt by formidable defence-works. A series of
trenches, strengthened by defence-works of every kind and by
strong points such as the Brasserie du Mail on the Bank of the
Aisne, began in the middle of the Mail. They branched out at the end
of the Promenade into a great number of outposts, blockhouses and
observation posts, from which the naked eye could discern the
entrenchments of the camouflaged German outposts on the right
bank of the Aisne.
Communication with the Allies’ bridge-head on both banks was
ensured by foot-bridges, constantly under fire, and temporary ways
over the two partially destroyed bridges.
THE MAIL DURING THE WAR.

In the background: the band-stand near which General de
Grandmaison was killed.
THE PONT-NEUF, BLOWN UP BY THE BRITISH.
Cross the Aisne at the Pont-Neuf.
The Pont-Neuf or Pont-du-Mail, over which passes the National

Road (No 2) from Paris to Maubeuge, was built in 1903 of reinforced
concrete.
On September 1, 1914, the British blew up the middle arch. It was
subsequently found possible to contrive a crossing over the broken
arch, hidden from the view of the enemy by the gaily coloured tents
of a travelling show which happened to be in Soissons when war
was declared (photo below).
THE PONT-NEUF CAMOUFLAGED.
THE DISTILLERY IN 1917.
The French First Line in the Distillery.
From the Pont-Neuf, take the Avenue de Laon to the Place de Laon,
then take the Avenue de Vauxrot on the left to Vauxrot and Pasly.
(See map, p. 53 and Itinerary, p. 52)
About half-a-mile from the Place de Laon are the ruins of a large
distillery which formed the first French position and was strongly
fortified.
THE DISTILLERY IN 1918.
THE GLASS-WORKS AT VAUXROT.
In the foreground: A German grave.
The German First Line in the Glass-Works.
On the north of the distillery, beyond “No man’s land” with its barbed-
wire entanglements, a very important glass-works formed the first
German line. Before the war, these glass-works turned out several
millions of champagne bottles every year. A heap of these bottles is
visible in the photo below.
Between the buildings of these works, now completely ruined by the
incessant bombardments, are countless passages and trenches of
reinforced concrete, observation posts, blockhouses, concrete
machine-gun positions and deep dug-outs.
THE GLASS-WORKS OF VAUXROT.
In the background: Hill 136.

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3.5 Cost–Benefit Analysis of High-Speed Rail Projects . . . . . . . . . . . . . . 51

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 1

measure the change in individual well-being because it is not observable, it is possible

If an infrastructure manager provides unnecessary capacity or a firm puts more

There are, for example, economies of agglomeration resulting from a reduction in

Should we recommend the use of short-run marginal cost or long-run marginal

Transport improvements can be typically contemplated as exogenous interventions

1 This chapter is based on de Rus et al. (2022).

The cost–benefit analysis (CBA) of transport projects is commonly conducted

2.2 Cost–Benefit Analysis of Transport Projects:

2.2.1 A Basic Model to Measure Social Welfare Changes due

We assume an economy consisting of a representative individual, who has a contin-

j = 1, …, n. This individual chooses his optimal set of consumption activities by

which can be also rewritten as:

that is equal to:

where g j = p j + wt j represents the generalized price of good or service j. For

or, equivalently, in terms of generalized prices:

which can be also rewritten as:

First-order conditions are given by:

2.2.2 Measuring the Economic Effects of Transport Projects

Then, substituting the first-order condition of the individual’s maximization

Applying the envelope theorem, we obtain:

Leaving the assumption of a representative individual, the change in social welfare

which is zero, according to the first-order condition of the profit maximization

W = CV = WTP − Resources. (2.26)

W = CV ≈ CS + PS, (2.28)

2.3 Practical Rules for Cost–Benefit Analysis

Rus, 2019). Our analysis assumes a closed economy.

Following Johansson (1993), the individual’s indirect utility function is now

and using the concept of CV, we have that:

CV = CV P + OS + LS + RS + GS + ES, (2.31)

where CVP can be approximated by changes in consumers’ surplus; OS is the

W = CS + OS + LS + RS + GS + ES = WTP − Resources.

2.3.1 Guidelines for the Measurement of the Direct Effects

10 Notice that an external effect is a change in resources.

equilibrium is (g 0 , x 0 ), and marginal operating costs are constant and equal to c.

generalized prices (the so-called ‘rule of a half’).13 We distinguish between existing

In the case of deviated demand from mode or activity j, g 0j = p j + v j t 0j denotes

13 See Harberger (1965), Neuberger (1971) and Small (1999).

GSdj = τi pi1− x dj − τ j p −j x dj , (2.41)

W jd = CSdj + OSdj + GSdj + ESdj

= vi (ti0 − ti1 )xi0 − (ci1 − ci0 )xi0

It is immediate to check that Eqs. (2.38) and (2.45) coincide.

which is equal to expression (2.44).

W e = Resourcese = (ci0 − ci1 )xi0 + vi (ti0 − ti1 )xi0 , (2.49)

W = CV = WTP − Resources. (2.26)

W = CV ≈ CS + PS, (2.28)

CV = CV P + OS + LS + RS + GS + ES, (2.31)

where CVP can be approximated by changes in consumers’ surplus; OS is the

W = CS + OS + LS + RS + GS + ES = WTP − Resources.

GSdj = τi pi1− x dj − τ j p −j x dj , (2.41)

W jd = CSdj + OSdj + GSdj + ESdj

W e = Resourcese = (ci0 − ci1 )xi0 + vi (ti0 − ti1 )xi0 , (2.49)