Economic Analysis Primer

Economic Impact Analysis

Economic impact analysis (EIA) is the study of the way in which the direct benefits and costs of a highway project (such as travel time saving) affect the local, regional, or national economy. It attempts to measure the consequences that a highway project or action will have on considerations such as local or regional employment patterns, wage levels, business activity, tourism, housing, and even migration patterns. As used in this primer, EIA should not be confused with Environmental Impact Analysis as related to requirements of the National Environmental Policy Act of 1969 and other environmental laws, regulations, and guidance.

Role of Economic Impact Analysis

BCA measures the direct benefits and costs that a project causes for highway agencies, travelers (users), and, in the case of externalities, to nonusers affected by the project. Direct benefits and costs are the first order or immediate impacts of the transportation project on users and nonusers, and consist of elements described earlier in this primer, including changes in travel time, crashes, vehicle operating costs, agency construction costs, and pollution costs. BCA typically does not measure how these direct benefits and costs are converted into indirect effects on the economy, such as changes in employment, wages,business sales, or land use. This is the role of EIA.

Economists generally hold that the direct benefits and costs of transportation improvements measured using BCA are converted into wider, indirect, economic impacts through the operation of the marketplace. These converted, indirect effects are assumed to have the same net monetary value as the BCA-measured direct effects. Significantly, the value of most converted economic effects is not additive to the value of the BCA-measured direct effects - rather, the former value is a restatement or capitalization of the latter value.

For instance, faster commuting times may induce more people to purchase houses distant from an employment center. This new demand for more remote properties drives up the price of the remote properties. Thus, the highway user transfers part of the value of his or her travel time saving to the owners of the remote properties in the form of a higher purchase price than he or she would have paid had the highway improvement not been built.

When to Do Economic Impact Analysis

In many instances, the findings of BCA are compelling in their own right. A project intended to improve safety or reduce traffic congestion can often be justified in light of the number and value of crashes avoided or hours of traveler time saved. Even so, indirect economic impacts measured by EIA based on BCA results are of major interest to decision makers, planners, and the public, especially for large projects that are expected to generate major direct transportation benefits and costs.

Similarly, individuals are generally at least as concerned about the specific effects of a project on themselves as they are about its overall effect on the public. People who would particularly benefit may advocate for the project; those who perceive that they would be worse off may raise strong objections to the project. EIA can identify who these people are likely to be and how they would be affected. If EIA shows that those who are better off from the project greatly outnumber those who are worse off, it is easier to build public support for the project.

Any State or local project or activity receiving Federal funds or other Federal approvals must undergo analysis of a comprehensive set of its social, economic, and environmental impacts under the provisions of NEPA. EIA can play an important role in supporting this analysis.

Methods and Tools

There are many different levels of sophistication in EIA. As with BCA, the best method and level of effort for any given project depends on the scale, complexity, and controversy of the project.⁴

Basic methods of EIA include survey studies, market studies, and comparable case studies. Surveys may take the form of expert interviews (e.g., with businesses along a route), vehicle origin-destination logs, collection of shopper origin-destination data, and corridor inventory (windshield survey) methods. Survey studies are generally qualitative interpretations of the effects of transportation projects, preferably informed by BCA and other economic data pertaining to the transportation effects of highway projects.

Market studies consider demand and supply for business activity and then attempt to quantify the effects on the market of a change in transportation costs caused by a project. Comparable case studies are most often used to evaluate the localized economic impacts of a project on neighborhoods, downtowns, or small towns. This approach is applied to projects such as bypasses of small towns, where comparable projects and situations elsewhere in the same State or region can be readily identified and studied.

More advanced EIA methods encompass econometric analysis and economic modeling, including productivity impact analysis and regional economic models. Productivity impact analysis, also known as the production function approach, attempts to measure aggregate economic growth that may result from additional highway spending. This approach seeks to capture productivity benefits not typically included in BCA.

Input-output analysis is a key component of most regional economic modeling of the employment, output, and income impacts of transportation infrastructure investments. Input-output analysis quantifies the multiple economic effects resulting from a change in the final demand for a specific product or service. For example, a person being paid to work on a highway project will spend some of those wages to buy goods and services. The money he or she spends shows up as sales and wages to other parties, who spend the money elsewhere, and so on. This chain of effects, known as the "multiplier," captures the distributive effects of transportation capital spending and operating benefits across a broad range of industries. Typically, the input-output multipliers are driven by the initial, direct benefits and costs of the project measured by BCA.

The simplest regional economic models are direct applications of input-output models, such as RIMS II ("Regional Input-Output Modeling System," 2nd edition, U.S. Department of Commerce). These applications are "static" in the sense that they provide an all-at-once view of economic effects, without a time component that is necessary for understanding when the effects will be realized. More sophisticated applications of regional economic models supplement input-output relationships with simulation techniques to forecast the year-to-year effects of projects on economic and demographic patterns. The most complex EIA models are those that integrate travel demand models, land use models, dynamic simulation economic models, and input-output models.

Presentation of Results

As a matter of best practice, EIA results should be presented as a complementary analysis to the BCA. BCA results show whether a project is worth the resources that will be invested in it from a total social welfare standpoint. EIA results are helpful in informing decision makers and the public about how and in what form the benefits and costs of the project will ultimately be distributed within the economy. Information from both analyses may be summarized in a recommendations package and considered jointly in reaching a decision on whether or not to go forward with a project. The EIA results should neither state nor imply, however, that the monetary value of indirect economic effects is additional to the NPV measured in the BCA. To do so would overstate the economic justification of the project by effectively double counting the project's net benefits.

⁴ The categories and descriptions in this section on EIA methods are based on NCHRP Synthesis Report 290, "Current Practices for Assessing Economic Development Impacts from Transportation Investments: A Synthesis of Highway Practice," 2000.