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Clarifying Economic Impact Analysis vs Benefit-Cost Analysis 63

Definition - What is Economic Impact Analysis?

In the context of transportation planning and policy, economic impact analysis (EIA) analyzes how a program or a project affects the economy of a given area. The economic impact area may be as small as a neighborhood or as large as the nation, depending on the scale of the program or project. Different measures of economic impact work at different spatial areas. At a neighborhood or corridor level, economic impacts may be measured in terms of the change in demand for locations– as reflected by increased property values, increased investment in new construction activity or increased density of development. At a regional or state or national level of analysis, the measures of economic impacts are in terms of changes in business output or gross state product (GSP) or gross domestic product (GDP), and the associated changes in jobs and in wage income.

Difference in Definitions

Within the broad field of transportation economic impact research, there are overlapping concepts of (a) the economic value of program or a project’s net benefits, and (b) the effect of a transportation program or project on the economic growth of a region (also referred to as the economic development impact). The economic value of benefits may be presented just in terms of “traveler benefits”(also referred to as “transportation system user benefits”) or in terms of wider “societal benefits” (also referred to as “social benefits”). Either way, some benefits reflect real monetary cost or income changes, while others have a value to people, though no actual transfer of money may take place. Major benefit categories for which the monetary transfers may not take place include travel time benefits, safety benefits, environmental quality benefits, and increases in choices of destinations or of travel modes or of the times at which travel can occur. Travel time benefits may occur due to reductions in travel times, and due to reductions in the uncertainty of travel times (reliability benefits).

In contrast, economic impacts refers more strictly to the effects on the economic activity in a given region, as reflected by a change in the flow of money (output, GDP or the income generated in the region). It may be presented as “the direct

economic impacts” on costs and revenues, or in terms of broader “economic impacts.”

Differences in Coverage.

Exhibit A-1 illustrates the basic differences in coverage of the analysis

approaches. The various measures are thus different and yet in many ways they are also complementary. While EIA excludes non-money impacts that are included in BCA, it includes indirect and induced impacts on business growth that are not included in BCA.

Exhibit A-1. Difference in the Coverage of Impacts Between Benefit Cost Analysis and Economic Impact Analysis

Form of Impact Benefit

Cost Analysis

Economic Impact Analysis

Business and household cost savings Yes Yes

Business-related time savings that generate cost savings Yes Yes

Personal time savings (not affecting money flows) Yes --

Environmental impacts (not affecting money flows) Yes --

Attractions (relocations) of business activity into area -- Yes Income generated by transit operations & suppliers -- Yes Source: Drawn from Weisbrod (2008)

EIA also reflects the impacts of changes in business productivity that result when transportation improvements enhance labor market access, business

agglomeration (density) and other factors that tend to be ignored in the traditional use of BCA. While these productivity impacts can theoretically be included in BCA as well, in practice they are seldom recognized. The need to recognize these productivity benefits in transportation policy and decision-making was made clear in a widely circulated discussion of BCA shortcomings that is contained in the United Kingdom’s Eddington Transport Study (2006).

The Eddington report identifies seven micro-economic drivers through which transport investment drives economic performance and which are beyond the parameters of benefit-cost but can be included in economic impact analysis. These are summarized as:

• Increasing business efficiency through time savings and improved

reliability for business travelers, freight, and logistic operations;

• Increasing business investment and innovation by supporting

economies of scale or new ways of working;

• Supporting clusters and agglomerations of economic activity;

• Improving the efficient functioning of labor markets, increasing labor

• Increasing competition by opening up access to new markets;

• Increasing domestic and international trade by reducing the costs of

trading; and

• Attracting globally mobile activity by providing an attractive business

environment and good quality of life.

There has also been a line of US-based research regarding the wider economic benefits of transportation investment, including many of the same types of economic productivity, market access and agglomeration economies affecting GDP (e.g., see Weisbrod and Treyz, 1998 and Weisbrod et al, 2001). However, a major aspect of the Eddington report is its further elaboration of three rather than two types of economic analysis that can be conducted. Eddington evaluates these three types of overall analysis:

• The conventional benefit-cost ratio which refers to the measure conventionally used;

• The wider benefit-cost measure which would add on to traditional b/c the “missing” gross domestic product (GDP) productivity impacts on the economy, as identified above; and

• The value for money (VFM) assessment which adds in the missing GDP impacts plus the monetized estimate of the environmental costs and some social costs.

The report concludes that the last and broadest measure can be the most

appropriate to use in evaluating transportation investments, and it shows how that measure can be used to evaluate a wide range of projects across modes and across investment purposes. Recommendations of the Eddington report are now being implemented in the UK. They have also received significant attention by transportation professionals in the US, and this TCRP report is intended to help further that discussion by showing how the GDP impacts of public transportation investment can be assessed in the US.

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