Tuesday, November 29, 2011

Economist's Notebook: Lake O Streetcar and Accounting v. Opportunity Costs

An article in The Oregonian discusses the new and improved cost figures for the proposed Lake Oswego Streetcar extension. In it, there is a discussion about whether the cost of the land that was purchased years ago should be included. This is a classic lesson in accounting versus opportunity costs in economics:
The new figure also does not include land owned by the government that originally had been included with capital costs. That alone reduced the price tag now being promoted by $80.3 million.

"I don't think it's disingenuous at all," said Obletz, who argued that the land is "not a cost to the project."

It may be correct to say the land is not an accounting cost for the project going forward, but it is entirely incorrect to say it is not a cost of the project. The reason economics makes the distinction is that the opportunity cost includes the next best alternative usage for the land and thus deciding to use the land for this project makes it unavailable for other uses.

In other words, if the land can be sold say for $100 million than utilizing it for this project denies that $100 million for any other use.  So, if you are doing a cost-benefit analysis of a project you have to include this cost as well, it is just as important as any real accounting cost going forward.

I kinda hope the streetcar guts built, it'd be pretty cool, but let's be real about the cost.


Torrid said...

The idea that the trackbed could reasonably be used for anything but rail service is mostly a nonstarter tho. It's worth 80-90m as tracks, a couple of nickels otherwise.

I think the more interesting debate was include it and try to get the extra 40-45mil in matches, or exclude it and gain local passage by showing a smaller bottom line (even if the larger figure reflects costs already paid for by ownership?)

Steve said...

I wouldn't say that the trackbed is worth little if not used for rail service. For example, it could be used as a mixed-use-path. In fact, comparing upgrading the Hwy 43 bus service and making the right-of-way a MUP with existing buses and a street-car, I'd argue the former would yield an even greater reduction in congestion at a lesser price tag.