2. Types of WEBs
There are currently three categories of WEBs that may be relevant for transport initiatives – discussed below. Using the terminology adopted in the UK, they are termed WEB1, WEB2 and WEB3.They arise from market imperfections, that is, prices of goods and services differing from costs to society as a whole.
2.1 Agglomeration economies (WEB1)
Agglomeration economies are benefits that flow to firms and workers located in close proximity (or agglomerating). Firms derive productivity benefits from being close to one another and from being located in large labour markets. Greater productivity in agglomerations arises from the fact that firms have access to larger product, input and labour markets, as well as face to face contact, information exchange and networking only available to industries working close to each other. Knowledge and technology spillovers are also important sources of agglomeration effects. Being an unpriced positive externality (Head, Ries and Swanson, 1995), agglomeration gives rise to a market imperfection. By bringing firms closer together and closer to their workforces, transport investment can generate an increase in labour productivity above that calculated from the direct user benefits alone (UK DFT, 2014).
Agglomeration effects are usually the largest source of WEBs, in terms of quantified benefits based on past estimates provided to Infrastructure Australia, and are only likely to be significant for initiatives that improve access to CBDs and other business districts of capital cities.
WEB1 is calculated by multiplying the change in ‘effective density’ (an accessibility measure) caused by a transport improvement by a ‘productivity elasticity’. Productivity elasticities vary by location and industry, and the relationship decays with distance. Econometric analyses of detailed firm-level data to estimate productivity elasticities have been undertaken for the UK and New Zealand, but not yet for Australia.
Transport initiatives can have offsetting negative agglomeration impacts where they shift economic activity away from one location to another. Hence, WEBs can be negative for some proposals. This is sometimes ignored in CBAs.
2.2 Output change in imperfectly competitive markets (WEB2)
A reduction in transport costs to business passengers or freight transport allows firms to profitably increase the outputs of the goods or services that use transport in their production. If the prices of the goods and services affected exceed costs, the increase in output will deliver a welfare gain as consumers’ willingness to pay for the increased output exceeds the cost of producing it. This welfare gain is on top of the benefit estimated for the associated generated trips in the conventional CBA framework.
For estimating WEB2, UK DFT (2014) recommends a simple approach of applying a 10 per cent uplift to business user benefits. The uplift percentage is derived from information about the average elasticity of demand for the goods and services affected and price–cost margins.
2.3 Tax revenues from labour markets (WEB3)
Transport costs (including time and reliability) affect individuals’ decisions about whether or not to work, where they locate and how far they are prepared to commute. If, as a result of a transport improvement, more people decide to work and some people are prepared to travel further to higher paying jobs, the full benefit to them from their additional trips will be captured by conventional CBA methods in estimating benefits from generated trips. However, commuters value benefits in terms of their post-tax incomes. Conventional CBA omits the additional benefit to society of the increase in tax revenues that accrues to the government.
Estimation of WEB3 requires use of labour supply elasticities to estimate numbers of new workers and workers moving to more productive jobs as a result of a transport improvement.