U.S. Department of Transportation Highway Cost Allocation Study
In 1997 the U.S. Department of Transportation (DOT) completed a cost allocation study (http://www.tfhrc.gov/pubrds/janpr/cost.htm), the objective of which was to evaluate the equity and economic efficiency of the federal highway user-fee structure. A major part of the study was the allocation of highway costs such as new construction, bridge construction and repair, among others, to the various vehicle categories - automobiles, busses, light trucks, and various classes of heavy trucks. The study included estimates of highway program costs and revenues for the year 2000, and using these figures determined projected "equity ratios' for each vehicle class. The equity ratio is defined as the cost incurred by the vehicle class (including allocated costs) divided by the user fees paid by the vehicle class. As defined, this means that vehicles with equity ratios less than one would expect to be subsidized by vehicles with ratios greater than one. An addendum to the study was published in May 2000 (http://www.fhwa.dot.gov/policy/hcas/addendum.htm). This addendum expanded the study significantly, including pollution costs not included in the 1997 study. The equity ratios changed only slightly.
Note: some of the Tables and Figures are missing from the 1997 study. For purposes of the requirements below, you will have to work only with the information provided.
1. Review the 1997 study and its May 2000 addendum and assess the cost allocation methodology as presented. Do you find the conclusions of the study to be justified, given your assessment of the methodology? Explain briefly why or why not.
2. The two studies refer to marginal highway costs and provide estimates of marginal costs for highway use. Assess the methodology related to the determination of marginal costs and the conclusions of the study in this regard
• Write a short paper (2-3 pages, 12 pt. double spaced) using appropriate business language, grammar, and formatting that addresses the requirements for the exercise.
This solution contains a review and explanation for cost allocation within the context of highways. References are also included in the solution.