Abstract
This paper analyzes the contribution of public infrastructure to private sector. It takes the example of road and rail and investigates their impact on South Korean manufacturing industries. To assess the cost structure and efficiency of investments in infrastructure, economies of scale, effects of infrastructure on variable cost and output, investment condition for infrastructure, and substitution and price elasticities are calculated. The divergence of infrastructure stocks from their static equilibrium levels influences production efficiency. Overall, investments in road and rail have positive effects on the manufacturing industries in Korea. This study expands the scope of existing studies by decomposing the internal rate of return (IRR) and the present value of benefit (BPV) into variable cost reduction, investment cost reduction, and rent. It was found that BPV checks only the magnitude of benefit, whereas IRR indicates the existence of efficiency by investigating total cost reduction and rent. Finally, by analyzing investment efficiency and changing benefit with respect to road and rail through the investment efficiency methodology that compares IRR with market interest rate, retrospective benefit-cost analysis is conducted.
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