- Email: [email protected]
The relevance of Dupuit in the 21st century
Transport Policy xxx (xxxx) xxx–xxx
Contents lists available at ScienceDirect
Transport Policy journal homepage: www.elsevier.com/locate/tranpol
The relevance of Dupuit in the 21st century Roger Vickerman School of Economics, University of Kent, UK
A R T I C LE I N FO
A B S T R A C T
Keywords: Cost-benefit analysis Infrastructure appraisal Wider economic impacts Marginal analysis
This short note considers the issues raised by Rothengatter's paper and discusses their implications for the way major transport infrastructure investments are appraised today. Using examples from some recent UK appraisals it focuses on the question of the difference between the marginal assumptions used as the basis of most costbenefit analysis and the step changes implicit in large scale infrastructure projects. Further it looks at the extent to which wider economic impacts can be assimilated into appraisal rather than being treated as an add-on to conventional CBA.
Werner Rothengatter (2016) has provided a valuable background to understanding the way in which Dupuit's seminal contribution both gives a basis for our understanding of the benefits from transport infrastructure and has been, if not misinterpreted, largely ignored in terms of its real contribution. Rothengatter ascribes the differences to the role of the marginalists, led by the major work of Alfred Marshall (1890), and compares this to the misunderstandings that arose in trying to reconcile the differences between Keynes and the classics over macroeconomics. In this short contribution, I want to focus on the way in which a re-examination of Dupuit can help us understand better the total contribution of a transport project to the economy in contrast to the traditional cost-benefit analysis (CBA) based on Marshallian consumer surplus. The main concern here is not so much the problem of assuming a marginal analysis, but of the continuity of demand and supply implied by such marginal analysis. Most changes in transport infrastructure, not least Dupuit's famous example of the bridge, create step changes in supply and can initiate fundamental changes in demand as they open up new opportunities in terms of market origins and destinations. As Rothengatter points out, Dupuit's focus on the markets and prices of the products transported distinguishes his approach from the standard CBA approach that only considers demand and supply, and hence the equilibrium price, in the transport market. This assumes that the rest of the economy works under perfect competition so that prices in transport-using markets reflect marginal costs (including the price of transport) so that any change in the transport market leads to a precise and predictable change in the using markets. This result was demonstrated clearly by Jara-Diaz (1986) and Dodgson (1973). The challenge to this orthodoxy came through the insights of the new economic geography, which initially addressed the question of international trade under conditions of imperfect competition (Krugman, 1991), and was
the basis of the analysis in SACTRA. (1999) which helped to renew the interest in the wider economic impacts of transport projects. My guess is that Dupuit would have found the ensuing debate rather odd, but it can be explained by the way that the twentieth century development of CBA essentially conflated the insights of Dupuit and Marshall, looking for the common ground between them in terms of their use of marginal utility (albeit defined differently) rather than the differences. To some extent this can be excused by the increasing desire to seek precision; the increasing requirement to use CBA as the basis for investment decisions necessitated more accurate forecasts of demand. The simplest way to operationalise this was to assume a fixed trip matrix so that origins and destinations did not change only the volume of travel between two points as, for example, the time taken was reduced. Whilst traveller markets could be segmented, reflecting for example different journey purposes (or the time sensitivity of goods in transit), and thus provide some relationship to the final activity for which the travel was undertaken, the focus was on trip generation and mode and route choice, not the markets for the activities. Dupuit's intuitive explanation of the impact of a canal on the markets for the goods carried, as described by Rothengatter, is essentially a nineteenth century application to a simpler network than that which analysts of the twenty-first century need to embrace. Marshall also seemed to think that his definition of consumers' surplus was more of theoretical than practical importance; he seemed to think that it was virtually incapable of being quantified according to Groenewegen (2007, p.113). More complex networks need even more complex tools. The problem with the increasing complexity of the theoretical models to deal with the wider impacts of transport infrastructure improvements, those outside the transport sector itself, is that they become increasingly difficult to derive tractable empirical models. As Gaudry (2016) shows, extensions of a standard demand model to deal
E-mail address: [email protected]. https://doi.org/10.1016/j.tranpol.2018.04.015
0967-070X/ © 2018 Elsevier Ltd. All rights reserved.
Please cite this article as: Vickerman, R., Transport Policy (2018), https://doi.org/10.1016/j.tranpol.2018.04.015
Transport Policy xxx (xxxx) xxx–xxx
R. Vickerman
Marshallian consumers’ surplus and those benefits are heavily dependent on estimates of the value of time savings that traditionally derive from assumptions of marginal and continuous demand models. As the emphasis has shifted away from a focus on user benefits to the total impact that a major project may have on employment and output, and its distribution between different areas or regions, there needs to be a corresponding shift in understanding a different sort of model by policy makers. On this a reappraisal of the intuitive observations of Dupuit may provide a useful way of bridging the two approaches. The Dupuit examples are based on relatively simple networks, but the approach in the paper by Gaudry moves us towards analysing more complex networks and the model presented by Ivaldi and Toru-Delibaşi shows how competition in economies with taxation can be handled. Blending these approaches is a target for future research.
with reliability in the context of a major increase on infrastructure provision in Paris leads to a high level of complexity. Compare this with the much more intuitive insights of Dupuit (1849), quoted by Bonnafous and Baumstark (2016), concerning the building of a footbridge. The danger is that the increasing complexity of the models begins to lose that clear insight. Whilst the results obtained by Gaudry seem intuitively correct, the route to the results is only transparent to the modeller; the decision maker thus has to take much on trust and this may cause problems when decisions are subject to public scrutiny (see Vickerman (2015), for a fuller discussion). The modern world is also rendered more complex by the increased role of the public sector and international competition. Dupuit himself had identified the potential problem of deficits resulting from an application of marginal cost pricing as identified by Bonnafous and Baumstark (2016) in their discussion of the way Maurice Allais built on Dupuit's insights. This picks up an issue raised by Venables (2007) who identified how the tax wedge in the labour market distorts the simple CBA analysis. Although it is applied to an apparently simple problem, the analysis by Ivaldi and Toru-Delibaşi (2016) shows how allowing for taxation in an international market impacts on competition between airlines. Two recent attempts to break out from the strict CBA framework of benefit estimation in the UK have also raised the suspicion that there is still a tendency to want to boost benefits when projects are under scrutiny. In the case of the HS2 high-speed rail line from London to Birmingham, Manchester and Leeds, KPMG (2013) tried to estimate economic impact directly using measures of business connectivity. In one sense this could be seen as in the Dupuit tradition of focusing on the final markets whilst simultaneously getting away from the idea of continuous accessibility change implied in the current UK WebTAG guidance (Department for Transport, 2014) based on economic mass as used by Graham (2007). The problem is that such models need to take their parameters from known existing data on elasticities and how these are combined causes problems. Nevertheless, the results suggest a much stronger impact on both total economic growth and its regional distribution than the more conventional modelling approaches, implying a potential transformational impact on the economy (see Vickerman (2018), for a fuller discussion and Laird et al. (2014), for a discussion of the potential transformational impacts of transport). The second example is that of the economic impact of the creation of new runway capacity in the London airports. The approach taken here was to use a spatial computable general equilibrium model (PwC, 2013), which again produced significantly larger overall impacts on the UK economy than more conventional modelling. Interestingly, the UK Department of Department for Transport (2015), in its review, accepted the broad approach, but roughly halved the estimated economic benefits from each option. This did not change the ranking of the alternatives, nor the decision to proceed, but it does suggest that policy-makers are nervous of using models that predict benefits that appear to be much larger than those from conventional transport CBA applications (see Vickerman (2017), for a fuller discussion of this point). It would seem therefore that, despite an accumulation of evidence that transport investments do have wider economic impacts than those captured by conventional CBA, policy makers are reluctant to accept at face value the estimates produced by more innovative methods. The conventional CBA focuses on transport user benefits as defined by
References Bonnafous, A., Baumstark, L., 2016. Calcul économique et politique de transport : de Jules Dupuit à Maurice Allais. In: Paper to Special Session on Jules Dupuit, 14th World Conference on Transport Research, Shanghai. Department for Transport, 2014. WebTAG: TAG Unit. Department for Transport, London A2–A1 wider impacts. https://www.gov.uk/government/publications/webtag-tagunita2-1-wider-impacts. Department for Transport, 2015. Review of the Airports Commission's Final Report. . https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/ 562467/r eview-of-the-airports-commissions-final-report.pdf. Dodgson, J.S., 1973. External effects and secondary benefits in road investment appraisal. J. Transport Econ. Pol. 7, 169–185. Dupuit, J., 1849. De la législation actuelle des voies de transport, nécessité d'une réforme basée sur des principes rationnels. In: Guillaumin (Ed.), Journal des Economistes, tome 23, 8ème année avril-juillet, pp. 217–231 Paris. Gaudry, M., 2016. The demand for journey duration and reliability: Paris Region work trips by mode and sex, 2010–2011. In: Paper to Special Session on Jules Dupuit, 14th World Conference on Transport Research, Shanghai. Graham, D.J., 2007. Agglomeration, productivity and transport investment. J. Transport Econ. Pol. 41, 317–343. Groenewegen, P., 2007. Alfred Marshall: Economist 1842-1924, Great Thinkers in Economics Series. Palgrave Macmillan, London. Ivaldi, M., Toru-Delibaşi, T., 2016. Competitive impact of the air-ticket levy on the European airline market. In: Paper to Special Session on Jules Dupuit, 14th World Conference on Transport Research, Shanghai. Jara-Diaz, S.R., 1986. On the relation between users' benefits and the economic effects of transportation activities. J. Reg. Sci. 26, 379–391. Krugman, P., 1991. Increasing returns to scale and economic geography. J. Polit. Econ. 99, 483–499. KPMG, 2013. HS2 Regional Economic Impacts Ref: HS2/074, High Speed Two (HS2) Limited. Laird, J., Nash, C., Mackie, P., 2014. Transformational transport infrastructure: costbenefit analysis challenges. Town Plan. Rev. 85, 709–730. Marshall, A., 1890. Principles of Economics, eighth ed. Macmillan, London 1920. PwC, 2013. Modelling Airline Sector Linkages: a Computable General Equilibrium Analysis (A report to the Airports Commission). . https://www.gov.uk/government/ publications/airports-commission-interim-report. Rothengatter, W., 2016. Mr. Dupuit and the marginalists. In: Paper to Special Session on Jules Dupuit, 14th World Conference on Transport Research, Shanghai. SACTRA (Standing Advisory Committee on Trunk Road Assessment), 1999. Transport and the Economy. The Stationery Office, , London. Venables, A.J., 2007. Evaluating urban transport improvement: cost benefit analysis in the presence of agglomeration and income taxation. J. Transport Econ. Pol. 41, 173–188. Vickerman, R.W., 2015. Economic impacts of transport policy. In: Nash, C. (Ed.), Handbook of Research Methods and Applications in Transport Economics and Policy. Edward Elgar, Cheltenham, UK/Northampton, MA. Vickerman, R.W., 2017. Beyond cost-benefit analysis: the search for a comprehensive evaluation of transport investment. Res. Transport. Econ. 63, 5–12. Vickerman, R.W., 2018. Can high-speed rail have a transformative effect on the economy? Transport Pol. 62, 31–37.
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Contents lists available at ScienceDirect
Transport Policy journal homepage: www.elsevier.com/locate/tranpol
The relevance of Dupuit in the 21st century Roger Vickerman School of Economics, University of Kent, UK
A R T I C LE I N FO
A B S T R A C T
Keywords: Cost-benefit analysis Infrastructure appraisal Wider economic impacts Marginal analysis
This short note considers the issues raised by Rothengatter's paper and discusses their implications for the way major transport infrastructure investments are appraised today. Using examples from some recent UK appraisals it focuses on the question of the difference between the marginal assumptions used as the basis of most costbenefit analysis and the step changes implicit in large scale infrastructure projects. Further it looks at the extent to which wider economic impacts can be assimilated into appraisal rather than being treated as an add-on to conventional CBA.
Werner Rothengatter (2016) has provided a valuable background to understanding the way in which Dupuit's seminal contribution both gives a basis for our understanding of the benefits from transport infrastructure and has been, if not misinterpreted, largely ignored in terms of its real contribution. Rothengatter ascribes the differences to the role of the marginalists, led by the major work of Alfred Marshall (1890), and compares this to the misunderstandings that arose in trying to reconcile the differences between Keynes and the classics over macroeconomics. In this short contribution, I want to focus on the way in which a re-examination of Dupuit can help us understand better the total contribution of a transport project to the economy in contrast to the traditional cost-benefit analysis (CBA) based on Marshallian consumer surplus. The main concern here is not so much the problem of assuming a marginal analysis, but of the continuity of demand and supply implied by such marginal analysis. Most changes in transport infrastructure, not least Dupuit's famous example of the bridge, create step changes in supply and can initiate fundamental changes in demand as they open up new opportunities in terms of market origins and destinations. As Rothengatter points out, Dupuit's focus on the markets and prices of the products transported distinguishes his approach from the standard CBA approach that only considers demand and supply, and hence the equilibrium price, in the transport market. This assumes that the rest of the economy works under perfect competition so that prices in transport-using markets reflect marginal costs (including the price of transport) so that any change in the transport market leads to a precise and predictable change in the using markets. This result was demonstrated clearly by Jara-Diaz (1986) and Dodgson (1973). The challenge to this orthodoxy came through the insights of the new economic geography, which initially addressed the question of international trade under conditions of imperfect competition (Krugman, 1991), and was
the basis of the analysis in SACTRA. (1999) which helped to renew the interest in the wider economic impacts of transport projects. My guess is that Dupuit would have found the ensuing debate rather odd, but it can be explained by the way that the twentieth century development of CBA essentially conflated the insights of Dupuit and Marshall, looking for the common ground between them in terms of their use of marginal utility (albeit defined differently) rather than the differences. To some extent this can be excused by the increasing desire to seek precision; the increasing requirement to use CBA as the basis for investment decisions necessitated more accurate forecasts of demand. The simplest way to operationalise this was to assume a fixed trip matrix so that origins and destinations did not change only the volume of travel between two points as, for example, the time taken was reduced. Whilst traveller markets could be segmented, reflecting for example different journey purposes (or the time sensitivity of goods in transit), and thus provide some relationship to the final activity for which the travel was undertaken, the focus was on trip generation and mode and route choice, not the markets for the activities. Dupuit's intuitive explanation of the impact of a canal on the markets for the goods carried, as described by Rothengatter, is essentially a nineteenth century application to a simpler network than that which analysts of the twenty-first century need to embrace. Marshall also seemed to think that his definition of consumers' surplus was more of theoretical than practical importance; he seemed to think that it was virtually incapable of being quantified according to Groenewegen (2007, p.113). More complex networks need even more complex tools. The problem with the increasing complexity of the theoretical models to deal with the wider impacts of transport infrastructure improvements, those outside the transport sector itself, is that they become increasingly difficult to derive tractable empirical models. As Gaudry (2016) shows, extensions of a standard demand model to deal
E-mail address: [email protected]. https://doi.org/10.1016/j.tranpol.2018.04.015
0967-070X/ © 2018 Elsevier Ltd. All rights reserved.
Please cite this article as: Vickerman, R., Transport Policy (2018), https://doi.org/10.1016/j.tranpol.2018.04.015
Transport Policy xxx (xxxx) xxx–xxx
R. Vickerman
Marshallian consumers’ surplus and those benefits are heavily dependent on estimates of the value of time savings that traditionally derive from assumptions of marginal and continuous demand models. As the emphasis has shifted away from a focus on user benefits to the total impact that a major project may have on employment and output, and its distribution between different areas or regions, there needs to be a corresponding shift in understanding a different sort of model by policy makers. On this a reappraisal of the intuitive observations of Dupuit may provide a useful way of bridging the two approaches. The Dupuit examples are based on relatively simple networks, but the approach in the paper by Gaudry moves us towards analysing more complex networks and the model presented by Ivaldi and Toru-Delibaşi shows how competition in economies with taxation can be handled. Blending these approaches is a target for future research.
with reliability in the context of a major increase on infrastructure provision in Paris leads to a high level of complexity. Compare this with the much more intuitive insights of Dupuit (1849), quoted by Bonnafous and Baumstark (2016), concerning the building of a footbridge. The danger is that the increasing complexity of the models begins to lose that clear insight. Whilst the results obtained by Gaudry seem intuitively correct, the route to the results is only transparent to the modeller; the decision maker thus has to take much on trust and this may cause problems when decisions are subject to public scrutiny (see Vickerman (2015), for a fuller discussion). The modern world is also rendered more complex by the increased role of the public sector and international competition. Dupuit himself had identified the potential problem of deficits resulting from an application of marginal cost pricing as identified by Bonnafous and Baumstark (2016) in their discussion of the way Maurice Allais built on Dupuit's insights. This picks up an issue raised by Venables (2007) who identified how the tax wedge in the labour market distorts the simple CBA analysis. Although it is applied to an apparently simple problem, the analysis by Ivaldi and Toru-Delibaşi (2016) shows how allowing for taxation in an international market impacts on competition between airlines. Two recent attempts to break out from the strict CBA framework of benefit estimation in the UK have also raised the suspicion that there is still a tendency to want to boost benefits when projects are under scrutiny. In the case of the HS2 high-speed rail line from London to Birmingham, Manchester and Leeds, KPMG (2013) tried to estimate economic impact directly using measures of business connectivity. In one sense this could be seen as in the Dupuit tradition of focusing on the final markets whilst simultaneously getting away from the idea of continuous accessibility change implied in the current UK WebTAG guidance (Department for Transport, 2014) based on economic mass as used by Graham (2007). The problem is that such models need to take their parameters from known existing data on elasticities and how these are combined causes problems. Nevertheless, the results suggest a much stronger impact on both total economic growth and its regional distribution than the more conventional modelling approaches, implying a potential transformational impact on the economy (see Vickerman (2018), for a fuller discussion and Laird et al. (2014), for a discussion of the potential transformational impacts of transport). The second example is that of the economic impact of the creation of new runway capacity in the London airports. The approach taken here was to use a spatial computable general equilibrium model (PwC, 2013), which again produced significantly larger overall impacts on the UK economy than more conventional modelling. Interestingly, the UK Department of Department for Transport (2015), in its review, accepted the broad approach, but roughly halved the estimated economic benefits from each option. This did not change the ranking of the alternatives, nor the decision to proceed, but it does suggest that policy-makers are nervous of using models that predict benefits that appear to be much larger than those from conventional transport CBA applications (see Vickerman (2017), for a fuller discussion of this point). It would seem therefore that, despite an accumulation of evidence that transport investments do have wider economic impacts than those captured by conventional CBA, policy makers are reluctant to accept at face value the estimates produced by more innovative methods. The conventional CBA focuses on transport user benefits as defined by
References Bonnafous, A., Baumstark, L., 2016. Calcul économique et politique de transport : de Jules Dupuit à Maurice Allais. In: Paper to Special Session on Jules Dupuit, 14th World Conference on Transport Research, Shanghai. Department for Transport, 2014. WebTAG: TAG Unit. Department for Transport, London A2–A1 wider impacts. https://www.gov.uk/government/publications/webtag-tagunita2-1-wider-impacts. Department for Transport, 2015. Review of the Airports Commission's Final Report. . https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/ 562467/r eview-of-the-airports-commissions-final-report.pdf. Dodgson, J.S., 1973. External effects and secondary benefits in road investment appraisal. J. Transport Econ. Pol. 7, 169–185. Dupuit, J., 1849. De la législation actuelle des voies de transport, nécessité d'une réforme basée sur des principes rationnels. In: Guillaumin (Ed.), Journal des Economistes, tome 23, 8ème année avril-juillet, pp. 217–231 Paris. Gaudry, M., 2016. The demand for journey duration and reliability: Paris Region work trips by mode and sex, 2010–2011. In: Paper to Special Session on Jules Dupuit, 14th World Conference on Transport Research, Shanghai. Graham, D.J., 2007. Agglomeration, productivity and transport investment. J. Transport Econ. Pol. 41, 317–343. Groenewegen, P., 2007. Alfred Marshall: Economist 1842-1924, Great Thinkers in Economics Series. Palgrave Macmillan, London. Ivaldi, M., Toru-Delibaşi, T., 2016. Competitive impact of the air-ticket levy on the European airline market. In: Paper to Special Session on Jules Dupuit, 14th World Conference on Transport Research, Shanghai. Jara-Diaz, S.R., 1986. On the relation between users' benefits and the economic effects of transportation activities. J. Reg. Sci. 26, 379–391. Krugman, P., 1991. Increasing returns to scale and economic geography. J. Polit. Econ. 99, 483–499. KPMG, 2013. HS2 Regional Economic Impacts Ref: HS2/074, High Speed Two (HS2) Limited. Laird, J., Nash, C., Mackie, P., 2014. Transformational transport infrastructure: costbenefit analysis challenges. Town Plan. Rev. 85, 709–730. Marshall, A., 1890. Principles of Economics, eighth ed. Macmillan, London 1920. PwC, 2013. Modelling Airline Sector Linkages: a Computable General Equilibrium Analysis (A report to the Airports Commission). . https://www.gov.uk/government/ publications/airports-commission-interim-report. Rothengatter, W., 2016. Mr. Dupuit and the marginalists. In: Paper to Special Session on Jules Dupuit, 14th World Conference on Transport Research, Shanghai. SACTRA (Standing Advisory Committee on Trunk Road Assessment), 1999. Transport and the Economy. The Stationery Office, , London. Venables, A.J., 2007. Evaluating urban transport improvement: cost benefit analysis in the presence of agglomeration and income taxation. J. Transport Econ. Pol. 41, 173–188. Vickerman, R.W., 2015. Economic impacts of transport policy. In: Nash, C. (Ed.), Handbook of Research Methods and Applications in Transport Economics and Policy. Edward Elgar, Cheltenham, UK/Northampton, MA. Vickerman, R.W., 2017. Beyond cost-benefit analysis: the search for a comprehensive evaluation of transport investment. Res. Transport. Econ. 63, 5–12. Vickerman, R.W., 2018. Can high-speed rail have a transformative effect on the economy? Transport Pol. 62, 31–37.
2