Benefit-Cost Analysis of State Highway Program as a Whole: Conceptualizing the Null Alternative

Abstract

Benefit-cost analysis (BCA) of highway projects is usually based on comparisons with a null or no-build alternative. More generally, any meaningful BCA must compare whatever is being evaluated with a reasonably complete and well-defined alternative state of affairs, sometimes referred to as the counterfactual world. The analysis, specification, and modeling of the counterfactual world used in a retrospective BCA of the Kansas Comprehensive Highway Program (1989-1997) are described. Retrospective BCA for a state highway program as a whole raises important issues not addressed in previous literature. Generally, the policy client is concerned with state impacts, not national impacts. Also, a benefit-cost ratio (BCR) is much more useful to policy makers concerned about future programs than is net present value. Unfortunately, measured BCRs are sensitive both to choice of counterfactual world and to conceptualization of costs versus negative benefits. Benefit-cost literature increasingly emphasizes the importance of documenting a well-defined counterfactual alternative. That is important because the net benefit of a project (i.e., benefit less cost) equals the sum of valuations of all differences between the actual world and the counterfactual world. Hence, in the absence of the counterfactual, the BCR is not well defined. A model for these concepts is provided, and the relationship to opportunity cost is clarified. The specific counterfactual used in the Kansas study is then described.