Once a transportation facility has been improved, travelers will adjust their behavior taking into account the lower cost of travel on the facility. To account for this induced demand, the benefits for both the existing and new users must be calculated using the elasticity of demand for travel on this facility and the concept of consumer surplus. Induced travelers must be benefiting from using the facility or they would not have chosen to change their behavior.
Each user of the transportation facility is willing to pay a certain price (in terms of time, accident risk, vehicle operating costs, tolls, etc.) to travel on that facility. This amount will differ from user to user. However, every user typically incurs the same travel time costs. The difference between what a group of users is willing to pay in terms of travel costs (travel time, etc.) and what they actually pay is called consumer surplus. In a benefit cost analysis we are concerned with the change in consumer surplus attributable to a transportation improvement.
A demand curve for transportation is presented in the figure below. If the cost of travel on the facility drops from P1 to P2, then the volume of traffic is expected to increase from v1 to v2. The existing users, who were all willing to incur a cost of travel greater than P1 before the improvement now only incur a cost of P2. Their change in consumer surplus is represented by the green rectangle. It can be calculated as:
CSexisting_users = v1 * (P1 - P2)
The new users did not previously use the facility and thus do not have a previous cost of travel. Instead, their change in consumer surplus can be estimated by finding the area below the demand curve and above the horizontal line at travel cost P2 and between v1 and v2. If the change in the cost of travel (i.e. the change in travel time) is relatively small, the curve can be assumed linear (Abelson & Hensher, 2001), thereby making the calculations simple:
CSnew_users = 0.5(v2 - v1)(P1 - P2)
The sum of these two values represents the estimated change in consumer surplus due to the transportation improvement.
Change in consumer surplus due to a transportation facility improvement
An intermediate level economics textbook should be consulted for further explanation of consumer surplus (for example, see Chapter 5 in Stiglitz (1999)).
We have shown how consumer surplus theory can be used to evaluate the benefits to the new and old users of the transportation facility. The origin of these new trips affects the externalities, both negative and positive, that are attributed to them. As stated in the first section, induced travel can come from a number of sources including:
In addition, transportation improvements can lead to longer trips. In the long run, transportation improvements can affect land use and auto-ownership, thereby increasing vehicle-miles traveled. The change in vehicle-miles traveled is the primary determinant of the change in benefits associated with externalities, including changes in emissions and changes in noise.
Users changing routes may represent an increase or decrease in vehicle-miles traveled. Their change in behavior may also lead to changes in the travel speeds on the routes they came from. To the extent that these effects can be estimated, the change in benefits associated with route changes should be evaluated. Users changing modes typically represent a change in vehicle-miles traveled if their previous mode was transit, and their new mode is a private vehicle, or if they switch from private vehicle to transit. Changes in the time of travel alone do not represent a change in vehicle-miles traveled, though this effect could alter travel speeds during the time they previously traveled. Users making new trips in private vehicles do represent an increase in vehicle-miles traveled and thus represent a change in the benefits associated with externalities.
Regional traffic models may provide some information on the source of induced travel. They can provide mode and route shifts as well as increases in trip distance. However, these models typically utilize fixed O-D tables and do not incorporate changes in land use brought about by accessibility improvements.
Some of these effects may be minor when compared with other benefits, such as the change in benefits to new and old users in the form of travel time savings, accident cost savings, and vehicle operating cost savings. In addition, errors in measurement could be greater than the effects being measured. Lee recommends ignoring what happens in related markets (parallel facilities), except maybe a few significant externalities in a few closely related markets (FHWA, 2002).
Incorporating induced travel into a benefit-cost analysis can be difficult, requiring additional calculations and often additional data. However, ignoring the effects of induced travel may lead to inaccurate benefit estimates, especially in congested corridors where relatively small changes in volume can have significant effects on transportation facility performance. Though estimating all of the effects of induced demand may be impractical (if not impossible), efforts should be taken to estimate the effects on the facility under analysis as well as any significant effects attributable to induced travel on related facilities.
Abelson, P. W. and D. A. Hensher. "Induced Travel and User Benefits: Clarifying Definitions and Measurement for Urban Road Infrastructure." In Handbook of Transport Systems and Traffic Control edited by Kenneth J. Button and David A. Hensher. Pergamon. 2001.
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.
Stiglitz, J. E. Economics of the Public Sector. Third Edition. W.W. Norton & Company, 1999.