Incorporating agglomeration economies in transport cost‐benefit analysis: The case of the proposed light‐rail transit in the Tel‐Aviv metropolitan area

. The economic evaluation of transport projects relies primarily on the impact of the project on road users. Economic benefits are calculated from a reduction in the aggregate value of time saved by the users, as well as from savings on vehicle‐operation and maintenance costs, reducion in traffic accidents, and more recently the negative environmental impacts that ensued. Most often the analysis assumes fixed demand. Major mass‐transit systems, like the new Light Rail Transit (LRT) currently proposed for the Tel‐Aviv Metropolitan Area (TAMA) in Israel, are expected to generate substantial new (induced) traffic. This development will most likely enhance the agglomeration forces at work in major urban concentrations. Agglomeration economies could lead to an upward shift in the production function of the metropolitan area, thus generating substantial additional benefits for the transport project. This article presents the methodology used to estimate the benefits derived from agglomeration economies induced by the aforementioned proposed new LRT in the TAMA. An estimate is made of the increase in the number of employees in the CBD owing to the proposed LRT and their potential contribution to the total annual production of the CBD. Agglomeration economies could add a significant amount of additional benefit to the transport project. In our case study the extent of these benefits increased the benefit‐cost ratio from 1.15 to 1.40.