Paying for heavier trucks

From today’s Strib: Editorial: Want heavier trucks? Fully fund highways. Again misanalyzing the issue they say
“Oberstar was right; raising the gas tax is doing the right thing. In the case of allowing heavier trucks on state roadways, it is also the necessary thing. “
Raising the gas tax on cars is not necessary to allow heavier trucks on the road. Raising the diesel tax on trucks might be somewhat more appropriate, after all, at least the class that benefits would be the class that pays. Even better would be charging trucks a weight-distance tax (pdf).
The cited issue brief (Legislative Committee Services Oregon Legislature, Dec. 2000) notes
“Most of the ongoing revenue collected by states and the federal government for highway construction and
maintenance is from vehicle fuel taxes. To the extent that a vehicle’s fuel use correlates with its road use
and wear, a fuel tax is an equitable way to “charge? for use of the road system. Variations in vehicle fuel
economy, however, weaken the correlation between a fuel tax and road wear. This is true for all vehicles,
but especially for heavy vehicles. An increase in truck weight that nearly doubles road wear may only
increase fuel use by 10%. A weight-mile tax can be structured to more accurately assess for costs of wear.”
This of course would not be popular among truckers, who would love to get all the benefit for one-tenth the cost by having light vehicles pay per distance instead.

DARPA Grand Challenge

DARPA Grand Challenge is a competition for driverless cars, the third of which will be held in an urban environment in November 2007. These challenges are excellent ways to motivate research (read Longitude by Sobel on earlier challenges). This is getting some buzz as one of the contestants is being parked at the London Science Museum, (an excellent Science Museum by the way).
Let’s hope this ends better than the Automated Highway System demonstration of 1997, which despite technical success resulted in cancellation of the program.
I believe Driverless cars will succeed where AHS did not, as this is a much better design path, as it does not require both new networks and new vehicles, only new vehicles which can operate (we hope without incident) in mixed traffic.

Are sunk costs sunk, is salvage value salvageable? A paradox in engineering economics analysis

Salvage value is defined as “The estimated value of an asset at the end of its useful life.”
Sunk cost is defined as “Cost already incurred which cannot be recovered regardless of future events.”
It is often said in economics that “sunk costs are sunk”, meaning they should not be considered a cost in economic analysis, because the money has already been spent.
Now consider two cases
In case 1, we have a road project that costs $10.00 today, and at the end of 10 years has some economic value remaining, let’s say a salvage value of $5.00, which when discounted back to the present is $1.93 (at 10% interest). This value is the residual value of the road. Thus, the total present cost of the project $10.00 – $1.93 = $8.07. Clearly the road cannot be moved. However, its presence makes it easier to build future roads … the land has been acquired and graded, some useful material for aggregate is on-site perhaps, and can be thought of as the amount that it reduces the cost of future generations to build the road. Alternatively, the land could be sold for development if the road is no longer needed, or turned into a park.
Assume the present value of the benefit of the road is $10.00. The benefit/cost ratio is $10.00 over $8.07 or 1.23. If we treat the salvage value as a benefit rather than cost, the benefit is $10.00 + $1.93 = $11.93 and the cost is $10, and the B/C is 1.193.
In 10 years time, the community decides to replace the old worn out road with a new road. This is a new project. The salvage value from the previous project is now the sunk cost of the current project (after all the road is there and could not be moved, and so does not cost the current project anything to exploit). So the cost of the project in 10 years time would be $10.00 – $5.00 = $5.00. Discounting that to the present is $1.93.
The benefit in 10 years time is also $10.00, but the cost in 10 years time was $5.00, and the benefit/cost ratio they perceive is $10.00/$5.00 = 2.00
Aggregating the two projects
the benefits are $10 + $3.86 = $13.86
the costs are $8.07 + $1.93 = $10.00
the collective benefit/cost ratio is 1.386
the NPV is benefits – costs = $3.86
One might argue the salvage value is a benefit, rather than a cost reduction. In that case
the benefits are $10.00 + $1.93 + $3.86 = $15.79
the costs are $10.00 + $1.93 = $11.93
the collective benefit/cost ratio is 1.32
the NPV remains $3.86
Case 2 is an identical road, but now the community has a 20 year time horizon to start.
The initial cost is $10, and the cost in 10 years time is $5.00 (discounted to $1.93). The benefits are $10 now and $10 in 10 years time (discounted to $3.86). There is no salvage value at the end of the first period, nor sunk costs at the end of the second period.
What is the benefit cost ratio?
the costs are $11.93
the benefits are still $13.86
the benefit/cost ratio is 1.16
the NPV is $1.93.
If you are the community, which will you invest in?
Case 1 has an initial B/C of 1.23 (or 1.193), Case 2 has a B/C of 1.16. But the real benefits and real costs of the roads are identical.
The salvage value in this example is, like so much in economics (think Pareto optimality), an accounting fiction. In this case no transaction takes place to realize that salvage value. On the other hand, excluding the salvage value over-estimates the net cost of the project, as it ignores potential future uses of the project.
Time horizons on projects must be comparable to correctly assess relative B/C ratio, yet not all projects do have the same benefit/cost ratio.
This “paradox” was first noted to me by Mark Snyder. I don’t know how widely it is known or understood, but it does affect analysis.

Mass Transport and Mainframes

A recent post on Jonathan Schwartz’s Weblog : The Glamor in Mass Transit (?) basically talks about the efficiencies of scale. Sun computer, which Schwartz leads, has long argued the network is the computer, and has been trying to move intelligence back from the decentralized desktop into the highly centralized information technology control center.
The comparison between mass vs. private transportation and mass vs. private computing is worth noting. Everyone has a mental image of mass transit, though that image varies by individuals, some who see it is valuable, some as something they would not touch. The perception of course is shaped by their individual experiences, preferences, locations, and so on. Mass transit is efficient in certain specific contexts, but it requires users give up an element of freedom and (in general) spend more time traveling.
The personal computer revolution of the late 1970s and early 1980s enabled individuals to have control over their computing environment, without relying on a third party to provide that service. This provided freedom (I can write my own programs, and run them when I want in real-time, not having to go down to the computer center and load my program on to the Cyber at Rich Hall at Georgia Tech, and wait 20 minutes for the output to be printed (in below zero F temperatures, really, in Atlanta, January 1985, you can look it up .. Reagan’s second innaugural was delayed by the same coldfront) so that I can do a homework problem for Professor Betamax’s Fortran class (the course was videotaped, and was replayed every hour, so we could attend when we wanted). I hear horror stories of people who work in controlled environments like Lotus Notes, where they can’t deal with email conveniently but require using a browser with a sluggish email program behind it.
So as much as we might curse personal computers, or cars, freedom of action is what they provide.
A good mass transit system, like the so-called web 2.0, can provide the same freedom through its ubiquity, and free the user from the need to manage complex systems (automobiles, computers), focusing only on the higher level decision (what I want to do, what I want to say, where I want to go). But it builds in additional dependencies (will the internet be up? will I have to pay to get access in a hotel room to my data? will the bus show up on time? does the bus really go there? what will google do with my data? do I want to see personalized ads based on my research paper on transportation?).
Freedom from and Freedom to are important distinctions. I would much rather have Freedom to act than freedom from cost or risk of acting.
What should be owned and what should be rented or provided as a service is one of those essentially tug-of-wars that shape every aspect of the modern economy. There must be some economies of scale, or we would not see scale, but there must also be diseconomies, and loss of freedom is one of them.

Network Neutrality: Lessons from Transportation

I recently finished an essay/paper on Network Neutrality.

The politically-charged notion of network neutrality came to the fore in 2005 and 2006, using analogy from transportation as one of the key tools in motivating arguments. This paper examines how the various notions around network neutrality (common carriage, regulation, price discrimination) have played out in the transportation sector, and suggests many of the current arguments fail to understand the nuances of how complex networks actually operate to serve the many demands placed on them.

The full document can be downloaded here
It has been published
Levinson, David (2009) Network Neutrality: Lessons from Transportation. Review of Network Economics 8(1) 13-21 [DOWNLOAD]

a blog about Networks and Places


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