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Subsidies for resident passengers in air transport markets

Listed author(s):
  • Jorge Valido
  • M. Pilar Socorro
  • Aday Hernández
  • Ofelia Betancor

In this work, we analyse from a theoretical perspective the efficiency of an ad valorem and a lump sum subsidy for resident passengers. In particular, we consider passengers with high and low willingness to pay that may be residents in a given area (and therefore entitled to a subsidy). All passengers are served by a monopoly air carrier that wants to get as much of their willingness to pay as possible. We show that if the proportion of resident passengers is high enough, non-resident passengers may be expelled from the market. Taken into account this undesirable situation we compare ad valorem and lump sum subsidies. We conclude that if the proportion of passengers with high willingness to pay is low (high) enough applying a lump sum (ad valorem) subsidy for resident passengers is better in social terms. We apply these results to a specific case study in the Canary Islands where ad valorem subsidies for resident passengers have been extensively used. We conclude that in most routes the lump sum subsidy is undoubtedly better in social terms.

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Paper provided by FEDEA in its series Working Papers with number 2012-10.

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Date of creation: Nov 2012
Handle: RePEc:fda:fdaddt:2012-10
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  1. James Nolan & Pamela Ritchie & John Rowcroft, 2005. "Small Market Air Service and Regional Policy," Journal of Transport Economics and Policy, University of Bath, vol. 39(3), pages 363-378, September.
  2. George Williams, 2005. "European Experience with Direct Subsidization of Air Services," Public Money & Management, Chartered Institute of Public Finance and Accountancy, vol. 25(3), pages 155-161, June.
  3. Aisling J. Reynolds-Feighan, 1999. "Subsidisation policies in the provision of air services to small communities : European and US approaches," Open Access publications 10197/2966, School of Economics, University College Dublin.
  4. Williams, George & Pagliari, Romano, 2004. "A comparative analysis of the application and use of public service obligations in air transport within the EU," Transport Policy, Elsevier, vol. 11(1), pages 55-66, January.
  5. Joan Calzada & Xavier Fageda, 2012. "Discounts and Public Service Obligations in the Airline Market: Lessons from Spain," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(4), pages 291-312, June.
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