Irreversibility and Flexibility in Public Investment Choice - a Case Study



Irreversibility and Flexibility in Public Investment Choice - a Case Study

Authors

DENANT-BOEMONT and HAMMICHE S, Laboratoire d'Economie des Transports, France

Description

For twenty years a lot of works have been introducing uncertainty in economics. However, in transport assessment is far fiom being the case. Nevertheless the uncertainty on future traffic demand seems to be intrinsic in transport economics.

Abstract

For twenty years a lot of works have been introducing uncertainty in economics. However, in transport assessment is far fiom being the case. Nevertheless the uncertainty on future traffic demand seems to be intrinsic in transport economics.

In 1994, the French planning authority (Commissariat General du Plan) published a report which advice to take externalities and irreversibility into account concerning cost-benefit analysis for public investments'.

Effectively, in transport studies, externalities are gradually integrated in economic assessment, but irreversibility not yet. However, this paper shows that irreversibility costs are not less than externalities costs for big projects.

This research shows the necessity of incorporating irreversibility in project analysis. So, a method is proposed in order to assess such irreversibility. We study a real case in transport and make a comparison between two rival projects: A motorway investment and a rail investment.

In a first section we will talk about the specific case of rail-motorway project compared to a standard motorway.

In a second section, we develop a two-period model of cost-benefit analysis with different levels of dynamic irreversibility for two rival investment choices. The important fact is that risk over traffic demand is decreasing over time. Then, in a third section, such a model is used to determine the quasi-Option Value of rail motorway investment (Henry (1974), Arrow, Fisher (1974), Dixit, Pyndick (1994)).

Publisher

Association for European Transport