Economics: Opportunity Costs and Sunk Cost Fallacy (The case of HS2)

High Speed Two

High Speed Two (HS2) is the railway line between London and Birmingham.  It was given approval by the UK government in February 2020.  The assumption here is that resources are scarce and so a choice must be made over how to allocate resources.  It is also assumed that it is not possible to have HS2 and local railway projects.

Opportunity Cost: Definition 

Opportunity cost is the amount lost by not using the resource in its best alternative use.  Under this concept the country has ‘given up’ local railway schemes to pay for HS2.  

Opportunity Cost: The concept applied to High Speed 2 

The concept is used to help decide which choice is preferable.  Money could be spent on the original choice or the ‘best alternative use’. For example, money spent on HS2 could be spent on many smaller transport projects, the best alternative use of the money allocated to transport.  Money spent on HS2 could have been spent on the restoration of a rail line to Fleetwood, north of Blackpool.   Spending on HS2, before February 2020, could have been allocated towards new trains for the Tyne and Wear metro.  The metro trains should have all been replaced by 2016 after 40 years of use.  Arguably, spending on HS2 has reduced investment in regional railways such as the metro.  Rather than investment in HS2, there are many alternative projects which could have restored the existing railway network instead.  For example, the rail line between Newcastle and Ashington could have been re-opened many years ago. 

Sunk Cost Fallacy: Definition

Sunk costs are ‘sunk’ if the costs have already been incurred and cannot be affected by a decision.  For example, a decision to build HS2. It is important to overlook ‘sunk costs’ as they should not influence future decisions.  Decision-makers commit the ‘sunk cost fallacy’ when they continue a behaviour as a result of previously invested resources.  The ‘sunk cost’ fallacy is the view that ‘sunk costs’ matter.

Sunk Cost Fallacy applied to High Speed 2 

It would be disappointing to abandon a project on which a lot of money has already been invested.  However, further investment in a failing plan is a mistake.  Decision-makers need to consider the costs and benefits of the project in the future.  The gains and losses, from the rest of the project, are what should influence the decision and not the money already spent.  There would have been a significant cost to abandon the HS2 project.  However, the decision to implement HS2 should not be about the £12 billion that had already been spent on the scheme.  Rather, the decision should have been about the future costs and benefits. Arguably, the costs versus the benefits of HS2, as calculated by the Treasury, were not persuasive to proceed with the project.  The £307 million pounds per mile of track suggests that the project is difficult to justify.  This huge level of further expenditure suggests that the HS2 planners may have suffered from ‘sunk cost fallacy’.  There may not be such a huge benefit to compensate for such heavy costs. Too much pre-occupation may have been given to the £12 billion pounds that has already been spent. 

Non-Financial Opportunity Costs

The land earmarked for HS2 could alternatively have been used as countryside to maintain biodiversity.   It is difficult to make a comparison between the financial benefit of the new rail line and the environmental loss from the land which will be destroyed.  It is difficult to put a financial value on the environment but if an infinite value is put on the land taken by HS2, then it would not be possible to build the railway. 

Environmental Considerations

The money allocated to HS2 could have been spent on ecologically acceptable regional projects.    There would not have been environmental protests against new trains, for the Tyne and Wear metro, using existing tracks.  One of the fundamental concerns with HS2 is not, the economic costs and benefits of the project, but the widespread loss of woodland and wildlife that will occur.  Arguably, the environmental ‘costs’ of HS2 have not been given sufficient consideration.  Especially when there were alternative projects available which were environmentally acceptable.

Afterthought

This is an article on the full costs of the high speed two rail line.  If the Grand Central Main Line had been maintained then HS2 would not have been needed.  The reopening the Great Central line would save billions of pounds and provide a transport link for the communities who have opposed the new HS2 rail line.  HS2 has another opportunity cost: the loss of the benefits brought by a re-opened Grand Central line.

Video on Opportunity Cost