Airline deregulation and external costs: a welfare analysis

The 'market internal' effects of airline deregulation have amply been analysed in the literature. The economic evaluation of this policy change has generally shown favourable outcomes in terms of consumer welfare. These welfare effects may be termed market internal effects, as they reflect the welfare consequences of transactions that take place in the market. However, aviation typically affects welfare through both market internal and external effects: these external effects usually take the form of external costs resulting from aircraft noise, emission of pollutants and accidents. This is true for both regulated and deregulated markets, but the importance of the external costs relative to the welfare total is likely to differ between regulatory regimes. This article seeks to analyze how the presence of external costs affects the welfare effect of the liberalization of airline markets. As the size of external costs in an airline market is largely determined by the number of landings and take-offs, a spatial competition model that explicitly determines the frequency choice by airlines in symmetric equilibria is the basis of the analysis.