Optimizing Multiple Airport Charges with Endogenous Airline Quality Considering the Marginal Cost of Public Funds

Doi, Naoshi and Kono, Tatsuhito and Suzaki, Izumo (2023): Optimizing Multiple Airport Charges with Endogenous Airline Quality Considering the Marginal Cost of Public Funds.

Abstract

Airport operation costs are financed by charge revenues from airport users and funds transferred from general government funds. This study quantitatively optimizes the rates of three types of airport-related charges: per-passenger charges (e.g., passenger service facility charges), per-flight charges (e.g., landing fees), and aviation fuel tax, explicitly considering the marginal cost of public funds of the general funds. This study uses a route-level empirical structural model in which airlines with market power set both airfares and service quality (i.e., flight frequency). Our results show that it is optimal to increase the transfer from the general funds from the current amount and that the optimization increases social welfare by 19 percent. Even if the amount of the transfer is fixed at the current level, the social welfare can be increased by 10 percent only by adjusting the current rates of the airport-related charges. In particular, we show that charges should be adjusted so as to increase flight frequency on routes where small aircraft are used.

• Item Type: MPRA Paper
• Language: English
• Keywords: Optimal taxation, Airport-related charge, Marginal cost of public funds, Discrete choice model, Endogenous quality
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H4 - Publicly Provided Goods > H41 - Public Goods; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R4 - Transportation Economics > R48 - Government Pricing and Policy

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