Wednesday, December 07, 2005

Applied Cost/Benefit Analysis: The Case of U.S Rail Transit Investments

Over 25 billion dollars were spent between 1970 and 2000 in sixteen major cities in the United States on the construction of new rail transit lines. Billions more have been spent on maintaining and improving existing rail transit lines.

Nate Baum-Snow of Brown University and I have been examining what have been some of the effects of this large investment. Today at Harvard’s Kennedy School I gave a brief talk sketching some of our research results and what there implications are for Boston as Boston continues to wrestle with making greater investments in its Green Line and Silver Line. You can find copies of our papers on Nate’s webpage at Brown.

Most of people attending my talk were not pro-economists. I expected this but what caught me by surprise was that several members of the audience continued to ask me the hard question “Is Public Transit a Good Investment?” I presume they were asking me for my “expert opinion” on whether this investment passes a cost/benefit test. While I agree that this is an interesting and important question, I wimped out! I refused to answer this question because as an empiricist I don’t feel like we know enough yet. Let me give some examples:

On the Benefits Side:

1. When new rail transit such as Boston’s Red Line gets built, some bus riders substitute to the faster rail mode. How much time do these bus to rail switchers save? How much do they value their time? How many people fall into this category?
2. When new rail transit allows people who work in the center city to commute by public transit rather than car to work, how much do past car commuters gain in consumer surplus by this mode switching?
3. If more people ride public transit rather than drive, how much are local environmental problems such as smog mitigated? How much do urban residents value this pollution reduction? How much less greenhouse gases are emitted if people use public transit rather than driving? How much do we value a ton reduction in greenhouse gases? (One study by Kirk Hamilton of the World Bank values a ton of carbon dioxide at $20)
4. How much extra profits do commercial firms (think Starbucks or restaurants) earn when they are close to fast, clean public transit? (My work with Nate only looks at residential commuters and not “fun non-work trips” or how businesses are affected by public transit expansions)
5. Under what circumstances can we simply use changes in home prices near new rail transit as a summary measure of the localized capitalization benefits of improved rail transit?

On the Cost Side:

1. What is the marginal cost of producing urban infrastructure? The Boston Big Dig’s cost over-runs highlight the importance of distinguishing ex-ante expected costs versus ex-post “actual costs”. In unionized cities, are the costs of producing such urban infrastructure much higher as powerful unions grab the money and pad their payroll? What role does corruption in construction and maintenance of these complicated systems play in raising costs?

If you give me answers to all of these questions, then I would feel more comfortable sitting down and presenting you my answer to this important cost/benefit question!