The extent to which an improvement to a transportation facility will induce additional travel is determined by the elasticity of demand for travel on the facility (the relationship between cost and demand) and the speed-volume relationship of the facility.
The relationship between the demand for travel on a facility and the performance of the facility is illustrated graphically in the figure below. In the figure the X-axis represents the volume of traffic on a hypothetical facility and the Y-axis represents the cost of travel (including the monetized value of travel time) on the facility. The curve labeled S1 represents the cost of travel for a given volume before a transportation improvement. S2 represents the cost of travel for a given volume after a transportation improvement. The curve labeled D represents the demand for transportation, or in other words the volume of transportation demanded at a particular cost of travel. Before the improvement, the cost of travel was P1 and the volume on the facility was v1. If no induced traffic were assumed, then the expected cost of travel would be Pe and the expected volume would be the original volume, v1. In other words, the same number of vehicles would now occupy an expanded facility. However, because demand is elastic the lower price induces additional traffic on the facility. An equilibrium is established at a travel cost of P2 and a volume of v2. The steeper the slope of the demand curve D, the lower the elasticity of demand and thus the lower the effects of improvements on the volume of traffic. The effects of the demand for transportation on benefits calculations are discussed in the section on evaluating the benefits of induced travel.
Highway capacity expansion and its effects on traffic volumes
Note: In the above figure, the Y-axis represents the cost of travel. In practice, it may be simpler to estimate changes in travel demanded and the performance of the highway based on travel times. The figure could have plotted the travel time on the facility versus the volume of traffic. The calculations are essentially the same, though for analysis purposes the changes in travel time would eventually be converted to a dollar amount.
Travel demand elasticities can be used to estimate travel induced by a transportation facility improvement. A discussion on elasticities of demand can be found in any microeconomics textbook (i.e. Chapter 7 of Nicholson (2002)). Here is a brief explanation:
The price elasticity of demand for transportation is equal to the percent change in the quantity of transportation demanded (traffic) over the percent change in price for transportation. In equation form:
e = %Δv / %Δp = Δv/v0 / Δp/p0
Where v is the quantity of traffic on a facility and p is the generalized price of travel. This price is comprised of all of the components of the cost of transportation experienced by the user, including vehicle operating costs, accident risk, travel time, and any other taxes or fees. External costs not experienced by the user, such as emissions costs, are not typically factored into a user's decision to travel and are thus not included in the generalized price. Travel demand elasticity with respect to price is normally negative because the quantity of traffic typically decreases with an increase in the price of travel.
Due to the difficulty of calculating the generalized cost of travel, empirical studies of induced demand often estimate demand elasticities with respect to a component of the cost of travel, such as travel time. Studies have led to a wide range of estimates, the reasons for which are explained in DeCorla-Souza & Cohen (1999). Other studies estimate travel demand elasticities with respect to increases in capacity. However, capacity expansion itself only leads to induced travel to the degree to which it lowers the cost of transportation on a facility. Capacity expansion on an uncongested highway would likely result in zero induced travel (DeCorla-Souza & Cohen, 1999). DeCorla-Souza & Cohen use a travel demand elasticity with respect to travel time of -0.5 and an extreme value of -1.0 in their example highway evaluation. The moderate elasticity of -0.5 is based on Goodwin (1996).
Once an elasticity has been chosen, a demand curve can be estimated given any point on a travel price vs. traffic volume or travel time vs. traffic volume plot for a facility. Typically the demand curve is assumed to be either linear or constant elasticity (for an explanation of both, see Nicholson (2002) pages 183-187). For a change in the price of travel (i.e. a change in travel time on a facility), the corresponding change in induced travel can be estimated using the travel demand elasticity. However, in the case of a congested facility, this induced travel will result in a change in the performance of the facility (and thus change the travel cost). An equilibrium point must be reached by iteratively estimating induced travel and travel price, which requires knowledge of the speed-flow relationship of the highway. For an example of this, see DeCorla-Souza (1999) and FHWA (2002). Many sources are available discussing the relationship between the volume of traffic on a facility and travel speeds. Transportation Research Board (1997) provides a detailed assessment of different estimates of speed-volume relationships with recommendations on which estimates are appropriate for various planning purposes.
The HERS-ST model uses both a short-run elasticity and long-run elasticity to evaluate the benefits of transportation projects (Lee, 2002). In the short run, it is assumed that changes in the price of transportation lead to movement along the short-run demand curve for travel. Traffic induced in the short run comes from diverted traffic, mode shifts, destination shifts, additional travel by current users, and time-of-travel shifts (in other words, short-run behavioral responses). The demand curve is considered fixed in the short run. Lee (2002) refers to an increase in the quantity of travel demanded in the short run as "induced traffic." In transportation planning this time period is typically about a year.
Lee (2002) uses the term "induced demand" for movement along the long-run demand curve. This movement represents a shift in the short-run demand curve. Lee explains that a shift in the short-run demand curve might be due to changes in land development, changes in freight transportation patterns, greater use of transportation in the production of goods, and changes in personal travel on highways relative to alternative modes due to the improvement. The Community Impacts section discusses the effects transportation projects have on land use patterns which in turn affect the long-run demand for transportation.
The HERS-ST model uses the short-run and long-run elasticities to forecast traffic for future funding periods. Values selected for the short-run and long-run elasticity are -1.0 and -1.6, respectively. For further discussion regarding the HERS-ST procedures, readers should consult the HER-ST Technical Report (FHWA, 2002) and Lee (2002).
In order to predict the effects of generated traffic, a traffic model needs a feedback mechanism which leads to calculations of equilibrium traffic and travel price levels. Traffic models typically predict route and mode shifts and some can predict scheduling and destination choice (Litman, 2004). However, few models predict changes in land use due to changes in accessibility. These changes in land use can increase trip production and trip attraction in traffic analysis zones (DeCorla-Souza & Cohen, 1999). The inability of models to accurately predict induced travel can lead to an overestimation of travel time savings and an underestimation of the disbenefits associated with pollution. Therefore, it is important to adjust for the additional induced travel by estimating the elasticity of travel demand.
Once estimates have been made regarding induced travel, the benefits attributed to induced travel must be evaluated.
DeCorla-Souza, P. and H. Cohen. "Estimating Induced Travel for Evaluation of Metropolitan Highway Expansion." Transportation 26, 1999, pp. 249-262.
Federal Highway Administration. HERS-ST v20: Highway Economic Requirements System - State Version Technical Report. FHWA-IF-02-060. Federal Highway Administration, Office of Asset Management. Washington DC. August 2002. Available at: http://www.fhwa.dot.gov/infrastructure/asstmgmt/hersdoc.htm. Accessed March 2004.
Goodwin, P. B. "Empirical Evidence on Induced Traffic: A Review and Synthesis." Transportation 23, 1996, pp. 35-54.
Lee, D.B. HERS-ST v20: Highway Economic Requirements System - State Version: Induced Demand and Elasticity. FHWA-IF-02-055. Federal Highway Administration, Office of Asset Management. Washington DC. August 2002. Available at: http://www.fhwa.dot.gov/infrastructure/asstmgmt/hersdoc.htm. Accessed March 2004.
Litman, T. "Generated Traffic and Induced Travel: Implications for Transport Planning." Victoria Transport Policy Institute. March 31, 2004. Available at: http://www.vtpi.org/gentraf.pdf.
Nicholson, W. Microeconomic Theory: Basic Principles and Extensions. Eighth Edition. South-Western, Thomas Learning, 2002.
Transportation Research Board. Planning Techniques to Estimate Speeds and Service Volumes for Planning Applications. National Cooperative Highway Research Program Report 387. Washington D.C., 1997.