For some time people have talked about a high speed rail link between Melbourne and Brisbane. Or at least Melbourne to Sydney.
A proposal was rejected by the last government on cost grounds. A new proposal is objected to on the same basis, but that's the wrong way to approach it.
Economists suggest that making a decision should be on the basis of a Cost-Benefit Analysis (CBA).
That means taking into account:
1. The direct costs of a decision e.g. The cost of building a railway and the interest on the money used to pay for it.
2. The direct revenues of a decision e.g. The value of fares collected by the railway.
3. The indirect costs of a decision e.g. The disruption caused to people who live near the railway (such as additional noise) or who have to move to allow the new railway to be built.
4. The indirect benefits of a decision e.g. The lower carbon emissions of trains over aircraft, the time saved by the passengers as a result of the new railway.
The first two are the costs and benefits considered by a firm in making a decision. The third and fourth are wider considerations which are equally important from an economists point of view.
Another point to bear in mind is that the railway will be there for a long time and so future costs and benefits, up to fifty years ahead, should be included.
The article below lists objections as 'the return is only 1%', and there 'isn't a spare $50bn lying around'. Both objections miss the point.
Firstly the return is much higher when the indirect costs and benefits are factored in over the whole time period. Secondly the $50bn is borrowed and repaid over time, it does not need to be available now. Indeed the people who will benefit form the proposed rail link will live in the future, it wouldn't be right for current taxpayers to shell out now for the railway.
Cost-benefit thinking is fundamental to economics thinking and decision making. Failure to think in those terms will lead to a lot of mistakes.
No comments:
Post a Comment