Economic impacts are the effects a project or policy has on the economy of a designated project area, measured in terms of the change in business sales, jobs, value added, income,or tax revenue. These effects are sometimes referred to as "economic development impacts". Whereas Benefit-Cost Analysis is an exercise to determine an action's social welfare effects (compared to costs), Economic Impact Analysis is an exercise to determine how a project or policy affects the amount and type of economic activity in a region.
Economic impacts can result from various sources, including time savings to businesses, household and business vehicle operating cost savings, the strengthening of local and regional market connectivity, induced land development, or increased tourism. In all cases, economic impacts arise because a transportation investment causes a change in prices, a change in household behavior, or a change in business behavior that improves business investment, attraction, expansion, retention, or competitiveness in the study area (when impacts are positive - of course, they can be negative as well).
A new highway connection makes it possible for a rural region to attract new industry, creating jobs and tax revenue.
Eliminating size or weight restrictions for a river crossing, airport, or marine port allows local business to expand shipping facilities, creating new jobs and tax revenue.
Expanded transit service to a low-income residential area increases residents' access to jobs, reducing unemployment, increasing income levels, and creating tax revenue.
A new highway interchange makes an abandoned industrial area more accessible and hence more attractive for office or industrial park redevelopment, leading to higher tax revenues.
Economic impacts are not included in benefit-cost analysis (with the exception of productivity impacts, discussed below). Economic development impacts occur as the end result of direct impacts of a transportation project on travelers and non-travelers. A transportation project may improve local business competitiveness (and hence economic growth) by reducing existing transportation costs (for employees and freight), expanding markets for business sales and services (providing more revenue with economies of scale in operations), and expanding labor market access (providing access to a broader job base). A transportation project may also affect economic growth by saving money for area residents (increasing available income to spend elsewhere in the economy) or by improving the attractiveness of the area as a place for people to live and locate their business activities.
Economic impact analysis differs from transportation system benefit-cost analysis in the following ways:
Geographic Scope - EIA focuses on changes in economic activity to households and businesses within in a well-defined study area (such as a County, Metropolitan Area, or State). In contrast, Benefit-Cost Analysis typically takes a wider view, measuring benefits to all users and non-users of a facility (regardless of where they live or work). Thus, BCA typically takes a national, or even global view.
Scope of Direct Benefits - BCA takes a wider view of direct benefits than EIA. Through a number of valuation methods, BCA attempts to capture welfare change of a project, even when those do not generate follow-on economic activity. A common example is personal travel time. BCA explicitly captures the value of time spent making a personal trip (for example, driving to see your daughter play soccer). In EIA, this trip generates no follow-on activity because if the traveler were not driving, she would otherwise doing leisure (non-productive) activities. Environmental and noise pollution are other direct costs that BCA can value, but are not included in economic impact analysis.
Scope of Follow-On Benefits - EIA takes a wider view of follow-on benefits than BCA. Economic impact analysis generally separates impacts into three categories: (1) direct impacts, which follow "directly" from traveler cost savings or other consequences of the investment, (2) indirect impacts, which occur when industries that are directly affected buy goods and services from other industries, and (3) induced impacts, which occur from increased household spending due to higher regional wages. Impacts (2) and (3) are considered "follow-on" impacts, and while they are typically included in EIA, they are explicitly excluded from BCA.
Fundamentally, EIA and BCA address different questions:
BCA - addresses whether society is better off by performing a certain action (such as building a road) versus doing nothing.
EIA - addresses how an economy is likely to change as a result of an action.
Because the practices address different questions, they can frequently be used in a complementary way to describe a broad set of outcomes from a project or policy. In particular, there are many times when the societal and local economic perspective are both relevant for planning purposes. Further, Transportation planning agencies are often interested in assessing economic impacts because they can indicate how well a project addresses three types of societal goals:
Economic impacts reflect how transportation improvements lead to tangible benefits for constituents of a government agency, who are generally residents of a particular city, metro area, county or state. This helps avoid the situation where residents of one area pay the full cost for a project that benefits only residents of another area.
Economic impacts reflect productivity benefits — not only those associated with reducing costs for existing travel patterns, but also those associated with expanding accessibility to broader product distribution, service, and labor markets. Increased market access can provide further productivity benefits related to "economies of scale" in business operations. It is sometimes erroneously stated that shifts in business location and growth patterns are a "zero sum game." Actually, business activity shifts would not occur unless there were at least some productivity benefits to justify the costs of relocating economic activity.
Economic impacts can also show movement towards addressing social equity goals — insofar as improved accessibility and redistribution of future business growth can also help to reduce disparities in job access and income levels between rich and poor areas, or between urban and rural areas.
When conducting BCA and EIA for the same project, it is important to keep the following points in mind:
Keep the analyses separate. Although both practices use some of the same initial information (such as travel time savings), results should be developed and presented separately to avoid any confusion.
Never add final economic impacts to BCA benefits.
Since economic impacts are a consequence of travel time and cost savings, it would be "double counting" to add economic impacts to transportation user benefits for the same trips. So while a transportation agency may be interested in both measures of a project's impact, care must be taken to avoid double counting when reporting overall project benefits.
Sources
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FHWA, Toolbox for Regional Policy Analysis Website (www.fhwa.dot.gov/planning/toolbox/index.htm) describes analytical methods for evaluating regional economic, social and environmental impacts of transportation and land use policies.
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