Tag: discounting

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HS2: a cost–benefit analysis (further update)

On June 20, the Review of the Government’s case for a High Speed Rail programme was published. This was commissioned by the Transport Select Committee from the independent consultancy, Oxera.

The programme is initially for a high-speed rail link form London to Birmingham and then subsequently for two additonal routes from Birmingham to Manchester and from Birmingham to Leeds. The whole thing is known as the ‘HS2 Y programme’

Oxera’s brief was to ‘provide an independent review of the economic case for the programme and to provide a set of questions that the Committee could use to probe the evidence base put forward by witnesses during its inquiry.’ In considering the economic case, Oxera focused on the economic, social and environment impacts, both monetary and non-monetary.

The summary to the report states that:

Overall, the case for the High Speed Rail programme seems to depend on whether and when the capacity is needed, the selection of the best VfM [value-for-money] approach to delivering that capacity, the degree of uncertainty around the monetised benefits and costs of the preferred options, and judgements on the balance of evidence relating to non-monetised items, such as environment and regeneration impacts (which are likely to be substantive in their own right but not fully set out in the Government’s assessment).

On July 19, the Institute for Economic Affairs, the pro-free-market think-tank, published a highly critical disussion paper, challenging the case for HS2. The paper, High Speed 2: the next government project disaster? arges that:

There is a significant risk that High Speed 2 (HS2) will become the latest in a long series of government big-project disasters with higher-than-forecast costs and lower-than-forecast benefits. HS2 is not commercially viable and will require substantial and increasing levels of subsidy. Taxpayers will therefore bear a very high proportion of the financial risks, which are wholly under-represented in the Economic Case presented by the Department for Transport.

The publication of the report and the IEA discussion paper has fueled the debate between supporters and opponents of HS2, as the articles below demonstrate.

Update
In November 2011, the House of Commons Transport Select Committee came out in favour of the government’s HS2 plans. According to the committee’s chair, Louise Ellman:

A high speed rail network, beginning with a line between London and the West Midlands, would provide a step change in the capacity, quality, reliability and frequency of rail services between our major cities.

A high speed line offers potential economic and strategic benefits which a conventional line does not, including a dramatic improvement in connectivity between our major cities, Heathrow and other airports, and the rest of Europe.

However, she did raise some issues that would need addressing concerning the overall level of investment in the rail network and the encironmental impact of HS2.

Investment in HS2 must not lead to reduced investment in the ‘classic’ rail network. We are concerned that the Government is developing separate strategies for rail and aviation, with HS2 separate from both. We call again for the publication of a comprehensive transport strategy.

Investment in high speed rail has potential to boost growth but may have a substantial negative impact on the countryside, communities and people along the route. This must be better reflected in the business case for HS2 and future phases of the project. We would encourage the Government to follow existing transport corridors wherever possible.

Further update
In January 2012, the government approved HS2. The Transport Secretary, Justine Greening, said:

I have decided Britain should embark upon the most significant transport infrastructure project since the building of the motorways by supporting the development and delivery of a new national high speed rail network.

The ‘articles for further update’ below give reactions to the announcement.

Articles
Is the UK’s high speed rail project a waste of money? BBC News, Rory Cellan-Jones (21/7/11)
On a collision path The Economist blogs, Blighty (21/7/11)
High speed rail dismissed as ‘vanity project’ by right-wing think tank The Telegraph, David Millward (19/7/11)
HS2 high-speed rail plans ‘a recipe for disaster’ Guardian, Dan Milmo (19/7/11)
High speed rail report shows ‘uncertainty’ over benefits Rail.co, A. Samuel (21/7/11)
Our high speed rail future BBC News, Rory Cellan-Jones (21/7/11)
Anger as high-speed rail link to London branded ‘vanity project’ Yorkshire Post (20/7/11)

Articles for update
MPs support plans for a high speed rail network BBC News, Richard Lister (8/11/11)
High-speed rail project will boost economy, say MPs Guardian, Dan Milmo (8/11/11)
High speed rail report ‘raises questions’ say opponents BBC News (8/11/11)
MPs back controversial high-speed rail link Yahoo News, Sebastien Bozon (8/11/11)
HS2 project: ‘Wrong to castigate locals’ BBC Today Programme (8/11/11)

Articles for further update
HS2 go-ahead sees mixed reaction BBC News (10/1/12)
HS2 – What’s in it for you? Channel 4 News (10/1/12)
Ready to depart: But will the HS2 express be derailed before it arrives? Independent, Nigel Morris (11/1/12)
HS2 go-ahead sees mixed reaction BBC News (10/1/12)
HS2 go-ahead sees mixed reaction BBC News (10/1/12)

Reports and discussion paper
Review of the Government’s case for a High Speed Rail programme Oxera Publishing (20/6/11)
High Speed 2: the next government project disaster? IEA Discussion Paper No. 36 (19/7/11)
Good case for high speed rail to run to Birmingham and beyond, say MPs House of Commons Transport Select Committee News (8/11/11)
Transport Committee – Tenth Report: High Speed Rail House of Commons Transport Select Committee (8/11/11)

Questions

  1. Itemise (a) the monetary costs and benefits and (b) the non-monetary costs and benefits of HS2 that were identified by Oxera. Try to identify other costs and benefits that were not included by Oxera.
  2. Why are the costs and benefits subject to great uncertainty?
  3. How should this uncertainty be taken into account by decision-makers?
  4. Explain the process of discounting in cost–benefit analysis. How should the rate of discount be chosen?
  5. What are the main criticisms of the report made by the IEA discussion paper?
  6. Assess these criticisms.
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Eating disorder

Are consumers ‘rational’ is the sense of trying to maximise consumer surplus? In some circumstances the answer is yes. When we go shopping we do generally try to get best value for money, where value is defined in terms of utility. With limited incomes, we don’t want to waste money. If we were offered two baskets of goods costing the same amount, we would generally choose basket A if its contents gave us more utility than basket B.

So why do we frequently buy things that are bad for us? Take the case of food. Why do we consume junk food if we know fresh produce is better for us? To answer this we need to look a little closer at the concept of utility and what motivates us when we consumer things. The following article does just that. It reports on writings of Michael Pollan. Pollan looks at our motivation when choosing what and how much to eat. For much of the time our choices are governed by our subconscious and by habit.

“Millions of humans, while believing they govern their actions with conscious intelligence, clean every morsel from their dinner plates, mainly because their parents told them to. And we do this even if we don’t particularly like the food on the plate and even if we know we should be eating less of it. Unthinkingly, we follow a habit we would condemn if we looked at it clearly.”

You mar what you eat and the politics of Michael Pollan National Post (Canada), Robert Fulford (18/1/10)

Questions

  1. What is meant by ‘rational behaviour’? Is it reasonable to assume that people are rational in most circumstances?
  2. Is eating junk food consistent with the attempt to maximise consumer surplus?
  3. How relevant is the principle of diminishing marginal utility in explaining the amount of junk food we eat?
  4. To what extent are the problems that Pollan identifies examples of (a) imperfect information; (b) irrationality?
  5. What does people’s eating behaviour reveal about their preferences for the present over the future and hence their personal discount rate?
  6. What are the policy implications of Pollan’s analysis for governments trying to get people to eat more healthily?
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Measuring the Earth

The health of an economy is generally measured in terms of the growth rate in GDP. A healthy economy is portrayed as one that is growing. Declining GDP, by contrast, is seen as a sign of economic malaise; not surprisingly, people don’t want rising unemployment and falling consumption. The recession of 2008/9 has generally been seen as bad news.

But is GDP a good indicator of human well-being? The problem is that GDP measures the production of goods and services for exchange. True, such goods and services are a vital ingredient in determining human well-being. But they are not the only one. Our lives are not just about consumption. What is more, many of our objectives may go beyond human well-being. For example, the state of the environment – the flora and fauna and the planet itself.

Then there is the question of the capital required to produce goods and maintain a healthy and sustainable environment. Capital production is included in GDP and the depreciation of capital is deducted from GDP to arrive at a net measure. But again, things are left out of these calculations. We include manufactured capital, such as factories and machinery, but ignore natural capital, such as rain forests, coral reefs and sustainable ecosystems generally. But the state of the natural environment has a crucial impact on the well-being, not only of the current generation, but of future generations too.

In the video podcast below, Professor Sir Partha Dasgupta, from the Faculty of Economics at the University of Cambridge and also from the University of Manchester, argues that the well-being of future generations requires an increase in the stock of capital per head, and that, in measuring this capital stock, we must take into account natural capital. In the paper to which the podcast refers, he argues “that a country’s comprehensive wealth per capita can decline even while gross domestic product (GDP) per capita increases and the UN Human Development Index records an improvement.”

Nature’s role in sustaining economic development (video podcast) The Royal Society, Partha Dasgupta
Nature’s role in sustaining economic development Philisophical Transactions of the Royal Society B, vol 365, no. 1537, pp 5–11, Partha Dasgupta (12/1/10)
GDP is misleading measure of wealth, says top economist University of Manchester news item (21/12/09)
Economics and the environment: Down to earth index Guardian (28/12/09)

Questions

  1. Why might a rise in GDP result in a decline in human well-being?
  2. In what sense is nature ‘over exploited’?
  3. What is meant by ‘comprehensive wealth’ and why might comprehensive wealth per capita decline even though the stocks of both manufactured capital and human capital are increasing?
  4. What is meant by ‘shadow prices’ in the context of natural capital?
  5. How might economists go about measuring the shadow prices of capital?
  6. What factors should determine the rate of discount chosen for projects that impact on the future state of the environment?
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What Al Gore doesn’t understand about climate change

Al Gore’s contribution to the global climate change debate is not in question and he has, along with the IPCC, been awarded the 2007 Nobel Peace Prize for his work in raising awareness. If you haven’t seen his film “An inconvenient truth” then do get hold of the DVD – it may just be the most interesting PowerPoint presentation you will ever see! However, does he really understand the nature of the debate? The article below suggests that he has not yet taken account of the most fundamental trade-off in dealing with climate change – the trade-off between our own quality of life and that of our descendants in the future.

Save the earth in six hard questions MSN Slate (22/10/07)

Questions

1. Explain what is mean by a trade-off “between the quality of our own lives and the quality of our descendants’ [lives]”.
2. What is meant by the term ‘risk-averse’ and how is this relevant in the climate change debate?
3. Consider the questions raised by the article. Discuss how relevant the conclusion reached is in the light of these questions.