Edited by André de Palma, Robin Lindsey, Emile Quinet and Roger Vickerman
Chapter 20: Surplus Theory
Yoshitsugu Kanemoto INTRODUCTION Cost–benefit analysis (CBA) is the main tool for economic evaluation of transportation projects and policies. It measures the social benefits and costs in monetary units as far as possible to check whether they are desirable from the viewpoint of society as a whole. In practice, CBA is supplemented by other types of analysis because it cannot deal with many important policy issues. For example, the distribution of benefits and costs may have to be forecasted to determine whether poor or special social groups bear disproportionately large burdens. Financial appraisals are also necessary to ensure that a project will be sustainable financially. The concept of consumer surplus constitutes the core of CBA. It was developed in the middle of the nineteenth century by the French engineer/economist Jules Dupuit (1844). In the twentieth century, the practical application of CBA spread to a variety of public infrastructure projects, such as waterways (in the Federal Navigation Act of 1936, the Corps of Engineers in the United States were required to carry out project improvements of the waterway system when benefits exceeded project costs), flood control (the Flood Control Act of 1939), highway investments and public transits. In 1981, President Reagan issued Executive Order 12291, which required regulatory impact analysis that contains ‘A determination of the potential net benefits of the rule, including an evaluation of effects that cannot be quantified in monetary terms’. (Executive Order 12291, 1981). Since then, the use of CBA has become so widespread in the government...
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