Freight Benefit/Cost Study: White Paper – Benefit-Cost Analysis of Highway Improvements in Relation to Freight Transportation: Microeconomic Framework

Final Report

February 26, 2001

Presented to:

Federal Highway Administration
Office of Freight Management and Operations
Attn: Ms. Kate Quinn

Presented by the AECOM Team:

ICF Consulting
HLB Decision Economics
Louis Berger Group

[ Accessibility Statement ]

Table of Contents

1	Introduction
2	Overview of Logistics and Industry Re-Organization
2.1	Framing the Problem
2.1.1	Meta-Analysis of Freight Economic Relationships
2.2	Integrating Re-organization Effects
2.3	Nature of Re-Organization
2.3.1	Changes in Logistics Network Infrastructure
2.3.2	Changes in Inventory Policy
2.4	The New Supply Chain
3	Developments To-Date for a Benefits Measurement Framework
3.1	Introduction
3.2	Benefit/Cost Analysis in a World of Marginal-Cost Pricing
3.2.1	The Basics of Road Improvement Benefit Estimation
3.2.2	Effects of Improving One Road on Other Roads
3.2.3	"Industrial Reorganization" Benefits
3.2.4	A Sample Benefit Estimation Model
3.3	BCA when Marginal-Cost Pricing Is More the Exception than the Rule
3.3.1	Measuring Aggregate Benefits when Marginal-Cost Tolls Are Not Charged
3.3.2	Taking Monopoly Elements into Account in Measuring Aggregate Benefits
3.4	Review of NCHRP 342
3.4.1	Approach and Assumptions
3.4.2	Benefits Derivation
3.4.3	Conclusion
3.5	Review of NCHRP 2-17(4)
3.5.1	Approach and Assumptions
3.5.2	Benefits Derivation
3.5.3	Productivity Gains
3.6	Critique of Developments to Date
3.7	Conclusion
4	Proposed Framework
4.1	Approach
4.2	Competitive Market
4.2.1	Special Case – Linear Demand Curve
4.3	Monopoly
4.4	Accounting for Non-Marginal Cost Pricing
4.5	Approach Summary
5	Implementation Issues
5.1	Information Requirements
5.2	Reliance on Stated/Revealed Preferences
5.3	Way Ahead
	References
Appendix 1	Logistics Cost Expression
Appendix 2	New Derivation of DC for NCHRP342

List of Exhibits

Exhibit 1	Freight Economics Influence Diagram
Exhibit 2	Relationship between total logistics cost and number of warehouses
Exhibit 3	Generalized cost trade-offs for transportation services
Exhibit 4	Basic inventory cost trade-offs
Exhibit 5	Inventory levels under a fixed order quantity-variable order interval policy
Exhibit 6	Direct very short run benefits of road improvements with marginal-cost tolls
Exhibit 7	Direct intermediate run benefits of road improvements with marginal-cost tolls
Exhibit 8	Direct and indirect effects of road improvement with marginal cost tolls
Exhibit 9	Direct and indirect effects of road improvement with marginal cost tolls
Exhibit 10	Cost characteristics of a single plant
Exhibit 11	Cost minimization choice of transportation and manufacturing outlays
Exhibit 12	Direct and indirect effects of road improvements with zero tolls
Exhibit 13	Direct and indirect effects of road improvements with zero tolls
Exhibit 14	Direct benefits of road use with inefficient tolls
Exhibit 15	Change in dead-weight loss with road improvement
Exhibit 16	Monopoly and benefit allocation
Exhibit 17	Monopoly benefit under-estimation
Exhibit 18	Productivity gains due to road improvements
Exhibit 19	Cost Savings by firm for relative changes in travel time
Exhibit 20	Aggregate industry relative cost savings and estimation of elasticity
Exhibit 21	Demand curve as affected by logistics re-organization
Exhibit 22	Freight economics influence diagram and previous studies
Exhibit 23	Aggregate relative change in transportation demand with respect to relative travel time savings
Exhibit 24	Demand curve for transportation
Exhibit 25	Benefits in the presence of Monopoly
Exhibit 26	Typical user link travel time graph and marginal cost

List of Tables

Table 1	Effects of Improved Freight Transportation
Table 2	Cost Ratios and Benefits of a 25% Reduction in Transport Prices
Table 3	Consumer Benefit v. Monopoly Benefit with Constant Elasticity Demand Schedules