Tuesday, July 22, 2008

Government and Free Markets?

This blog likes to identify how the absence of a market system in the allocation of scare resources cannot be solved efficiently by government intervention. Secretary of Transportation Mary Peters makes a compelling case for a free market solution to congested airports by illustrating the virtues of a peak pricing system for runways during rush hour--something that's clearly lacking today:

You’re already familiar with the concept of demand-based pricing. It’s why using your cellphone at night is cheaper than making a call on your lunch hour and why renting a beach house in New Jersey costs more in the summer than in the winter.

Under the current system, however, the airlines pay the airports the same price (based on aircraft weight) for flights at heavily congested times as every other time.

These weight-based prices mean that there’s no incentive for airlines to use larger planes, which can move more people during busy flight times. In fact, using smaller planes keeps demand — and ticket prices — higher. It should come as no surprise that delays at popular flying times and into popular airports have exploded in recent years...

After all, the airlines themselves lower ticket prices to attract passengers when demand is low and then raise prices to maximize revenues when demand is high. What would happen if airlines were required by the government to charge the same ticket price for travel on Dec. 24 as they charge in the middle of September? There would either be rationing of extremely scarce seats on Dec. 24 or exorbitantly high prices for widely available seats in the middle of September. In either case, this inefficient outcome would damage the economy broadly and the aviation sector specifically.

Yet that is exactly how airports charge airlines for the use of their terminals and runways.

Even as airfares at Logan Airport continue to rise while the number of flyers continues to fall, a peak hour pricing system would improve efficiency.

1 comment:

Josh McCabe said...

Carter/Reagan airline deregulation: Round II

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