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Techniques of Transport Planning Techniques of Transport Planning VOLUME ONE Pricing arid Project Evaluation Books published under the Transport Research Program Wilfred Owen Strategy for Mobility Cay Fromm, Editor Transport Investment and Economic Development Edwin T. Haefele and Elearwr B. Steinberg Government Controls on Transport: An African Case George W. Wikon, Barbara R. Bergtnan, Leon V. Hirsch, and Martin S. Klein The Impact of Highway Investment on Development Robert T. Brmun Transport and the Economic Integration of South America Holland Hunter Soviet Transport Experience: Its Lessons for Other Countries Wilfred Owen Distance and Development: Transport and Communications in India Edtoin i? Haefele, Editor Transport and National Goals ~MahlonR. Straszheim The International Airline Industry John R. Meyer, Editor Techniques of Transport Planning Volume 1: Pricing and Project Evaluation by John R. Meyer and Mahlon R. Straszheim Volume 2: Systems Analysis and Simulation Models by Paul 0. Roberts and David T. Kresge Techniques of Transport Planning John R. Meyer, Editor VOLUME ONE Pricing and Project Evaluation JOHN R. MEYER and MAHLON R. STRASZHEIM With special contributions by Benjamin 1. Cohen, Leon M. Cole, John F. Kain., Koichi Mera, Robert Mnookin, Paul 0. Roberts, G Martin Wohl The Brookings Institution TRANSPORT RESEARCH PROGRAM Washington, D.C. Copyright @ 1971 by THE BROOKINCS INSTITUTION 1775 Massachusetts Avenue, N.W., Washington, D.C. 20036 ISBN 04157--9 Library of Congress Catalog Card Number 79108833 Board of Trustees THE BROOKINGS INSTITUTION Douglas Dillon is an independent organization devoted to Choirman nonpartisan research, education, and pub- S dne Stein, Jr. dce ciaifitcon lication in economics, government, foreign policy, William R. Biggs and the social sciences generally. Its principal Chnirmun, Erecrrtive Committee Dillon Anderson purposes are to aid in the development of sound Vincent M. Barnett, Jr. public policies and to promote public under- Louis W. Cabot standing of issues of national importance. Robert D. Calkins Edward W. Carter The Institution was founded on December 8, John Fischer 1927, to merge the activities of the Institute for Kermit Gordon Government Research, founded in 1916, the In- Gordon Gray Huntington Hams stitute of Economics, founded in 1922, and the Luther 6. Holbrook Robert Brookings Graduate School of Economics John E. Lockwood and Government, founded in 1924. Robert S. McNamara William McC. Martin, Jr. The general administration of the Institution Ajay Miller is the responsibility of a Board of Trustees charged Herbert P. Patterson with maintaining the independence of the staff Peter G. Peterson J. Woodward Redmond and fostering the most favorable conditions for H. Chapman Rose creative research and education. The immediate Robert Brookings Smith direction of the policies, program, and staff of the J. Harvie Wilkinson, Jr. Donald B. Woodward Institution is vested in the President, assisted by Honorary Trustees an advisory committee of the officers and staff. Arthur Stanton Adams In publishing a study, the Institution presents Daniel W. Bell it as a competent treatment of a subject worthy Eugene R. Black Leonard Carmichael of public consideration. The interpretations and Colgate W. Darden, Jr. conclusions in such publications are those of the Marion B. Folsom author or authors and do not necessarily reflect Raymond B. Fosdick Huntington Gilchrist the views of the other staff members, officers, or John Lee Pratt trustees of the Brookings Institution. Foreword THECLOSE CONNECTION between transportation and eco- nomic development has long been recognized but neither well defined nor fully understood, least of all in the underdeveloped countries. This para- dox may stem from the widely held assumption that poor countries "need everythingv-that the inadequacy of their transport facilities would seem to justify almost any additional investment in highways, railroads, or port facilities. But such an assumption may be ill founded. Although the total investment in poor countries may be inadequate, parts of their transport systems may in fact have excess capacity. Faulty analysis could lead to investment decisions that would waste scarce capital on unneeded projects, with adverse consequences for the location of industries, use of resources, and economic growth. To shed light on planning problems and improve the quality of transport investment decisions in underdeveloped countries, the Brookings Institution has devoted much of its Transport Research Program to examining the interdependence of transport and development. The program has been supported by a grant from the U.S. Agency for International Development and directed by Wilfred Owen. It was conducted as part of the Brookings Economic Studies Program, headed by Joseph A. Pechrnan. Some of the research was conducted at Harvard University under the direction of John R. Meyer. The Harvard program consisted of a series of working seminars and related research studies in transport planning and economic development. A fundaniental premise of the Harvard pro- gram was that effective transport planning requires the systematic de- velopment and application of the principles of economic theory, engineer- ing, decision theory, and systems analysis, in a format which takes into viii PRICING AND PROJECT EVALUATION account the prevailing social, economic, and political environment. The interdisciplinary nature of the effort is shown in the academic background and experience of the participants, among whom were engineers, city planners, economists, and a lawyer. The integration of the principles of economic theory with techniques of systems analysis to define a trans- port planning framework has been the continuing challenge of the Har- vard research. The publication of Techniques of Transport Planning in two volumes completes the Harvard research and concludes the Brookings Transport Research Program. In this first volume, Pricing and Project Evaluation, the authors survey the principles of engineering design, price theory and welfare economics, capital budgeting, and decision theory as a basis for public policy decisions regarding transport investments. Using a single project as a frame of reference, they synthesize and extend the literature of conventional project evaluation, or cost-benefit analysis, as a tool for making those decisions. They thus lay the foundation for Volume 2, Sys- tem Analysis and Simulation Models, which extends the analysis of trans- port planning to the transport system as a whole. Many transport projects affect the performance of entire transport systems and have a pervasive influence throughout the economy, as the authors illustrate by applying their model to the Colombian economy and transport system. Volume 1 benefits from the contributions of several participants in the Harvard program, many chapters being the result of seminar papers and thesis research. The table of contents indicates the history of authorship. All the authors, especially the two principal ones, owe a substantial in- tellectual debt to the students, faculty, and visiting research associates who took part in the Harvard seminars. The authors also wish to thank the members of their reading committee-James R. Nelson, Robert Sadove, and George W. Wilson-for their comments; Ruth Westheimer for her editorial assistance; Irving Forman for drafting some of the more'complex figures; and Marina Ochoa for her revision and typing of innumerable drafts. As in all Brookings studies, the views expressed are solely those of the authors and should not be attributed to those who read and commented on the manuscript, to the Agency for International Development, or to the trustees, officers, or other staff members of the Brookings Institution. KERMIT GORDON President June 1970 Washington, D.C. Contents 1. The Transportation Planning Problem Systems versus Project Analysis 2 Planning in a Project Context 4 PART ONE : Pricing Principles and Their Implications 2. Alternative Pricing Strategies with Martin Wohl Conventional Practice: Monopolistic Price Discrimination and Average Cost Pricing 13 hlarginal Cost Pricing 15 Prices Based on User-Cost Estimates 17 Complex Differentiated Pricing Schemes 20 Options, Superpeaks, and Eclectic Pricing Strategies 2.3 Summary 27 3. Cost Concepts The Structure of Accounting Costs 31 Problems Associated with Conlmon Costs 34 Defining Marginal and Fixed Costs 35 Cost Concepts and Statistical Estimation 39 Summary 43 4. Congestion Cost and Transport Pricing with martin Wohl Short-Run Allocative Costs 45 Consumer Choice and Effects on Income Distribution 52 Adjustments to Congestion in the Long Run 55 Summary 58 X PRICING AND PROJECT EVALUATION 5. Problems of Resource Allocation in a Context of Second Best f30 with Robert Mnookin A Basic Model of Welfare Maximization in a Static Context 61 Market Imperfections: Distortion Parameters 66 The Explicit Model 69 Perfect Competition 72 Factor Market Imperfections 73 Product Market Imperfections 75 Production Parameters 76 Different Utility Weights 77 Conclusion 79 6. Criteria for Evaluating Alternative Pricing Strategies 80 Distributive EtFects 81 Location Consequences 82 Inflation, Technological Change, and Macroeconomic Policy 84 Miscellaneous Practical Considerations 87 Evaluation 88 Summary 95 PART TWO : Forecasting the Demand for Transportation 7. Transport Demands: The Basic Framework Land-Use or Economic Location Patterns 101 Trip Generation 103 Zonal Interchange or Distribution 104 Modal Choice 106 Route
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