Evaluation of Externalities in Transport Projects

Abstract

The purpose of this paper is to illustrate the variety of issues and methods used to treat
different types of externalities in transportation projects and to ask how these different
approaches and values can affect project evaluation and ranking. Of special interest is the
question whether the elimination of externalities and different procedures favor one type of
transportation investment over the other, and specifically rail projects versus highway
projects. To this point the paper mostly poses the questions with a focus on issues where bias
can result.

The paper is based on a study conducted for the Ministry of National Infrastructure in Israel
to improve the evaluation procedure of transportation projects in order to better account for
externalities. This paper focuses on two main issues. First, we recommend approaches and
methods of evaluation for different transport externalities, including the value of time
savings. These evaluations are based on the international literature on these topics. Second,
we suggest a methodology to better include externalities in the evaluation of transport projects, including a quantitative and qualitative multicriteria analysis (MCA). The paper
also discusses the implications of different methods and values for project evaluation.