One of the more important aspects of the analysis of a large investment project, such as the Third London Airport, is that of determining the optimal starting date. In this paper the criteria used by the Commission on the Third London Airport will be examined, and an alternative approach suggested. After examining the Research Team's Assessment, it is suggested that their methods of calculating the benefits from bringing forward the construction of the Third London Airport have resulted in overestimates. It is suggested that the starting date should be two, or possibly more, years later than the Research Team suggests. To a large extent the benefits will depend on what policies the authorities adopt to control the excess demand that will emerge, but it is arguable that the benefits are overestimated even on the unlikely assumption that nothing is done. The appropriate starting date of the Third Airport depends on many factors other than those mentioned here. For example, the forecasts of the growth in demand have been taken without question, yet these could be much in error. The pricing system used by airlines will affect demand for air travel and for airport facilities, and this system is at present being altered. As the degree of uncertainty is large at present, but will diminish as the starting date becomes nearer, there is a good case for postponing the decision on timing as long as possible and for continuously revising the estimate of the optimal starting date as more data become available. Rather than estimate delays which wuld almost certainly not be allowed to come about, it would be more productive to attempt to estimate a pricing structure for future demand levels which would keep demand in any period within capacity, and to calculate the social losses that this would entail. It would also be necessary to calculate the extent to which the extra capacity would be inferior to existing capacity, and the prices that would have to be charged to ensure its use. It could be argued that the starting date is not very sensitive to the level of costs, since costs approximately double each year. Even if costs are estimated to be twice as high in one case as in another, this will produce a change in the starting date of only one year. However, at the same time, a rapidly increasing cost function also implies that the cost of building at the wrong time is very large. The choice of when to build the airport is not much affected by the unquantifiable factors that were so important in the choice of where to build it; economic analysis can provide relatively unambiguous answers. Furthermore, the magnitude of the costs and benefits of a particular timing decision are quite significant in themselves, and considerably exceed those of projects which have been analysed much more thoroughly.

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    London School of Economics and Political Science

    Houghton Street, Aldwych
    London WC2A 2AE,   England 
  • Authors:
    • FORSYTH, P J
  • Publication Date: 1972-1

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  • Accession Number: 00155675
  • Record Type: Publication
  • Source Agency: Massachusetts Institute of Technology
  • Files: TRIS
  • Created Date: Aug 31 1977 12:00AM