Last week’s warning by the Federal Aviation Administration that it may cap takeoffs and landings at Chicago’s O’Hare airport just reinforces old economic insights.
If the price of some useful good is zero, people will want to consume large — perhaps infinite — quantities of it. If there isn’t enough of a good to go around, the most efficient way to decide who should get it is to raise the price.
FAA administrator Marion Blakey made a classic economic argument for government action. More takeoffs and landings than O’Hare can handle produce delays that spill over to other U.S. airports and to flights that never come near Chicago. This is what economists call an “external cost” or “externality.”
Economic theory is clear that free markets don’t produce efficient outcomes when there are significant external costs. Government action may improve outcomes for society as a whole in such situations, though there are no guarantees that government can inherently make things better.
Airport congestion is one problem where economists have a good solution to propose. If airlines want more slots than are available, the first step is to start charging for slots. If the appropriate prices are not clear, and they usually are not, then let the market decide through an auction.
If it is profitable for an airline for one of its planes to land or take off at a particular time, it can pay for that right. If there is little economic advantage for the airline having that particular time, it can opt for another that is cheaper.
True conservatives don’t have any problem with that idea. Even so, some Republicans who have conniption fits whenever taxes are mentioned also go spastic at the mention of government auctioning off scarce resources rather than doling them out free administratively.
They need not worry. Proceeds of government-sponsored landing slot auctions could fund a reduction in the federal excise tax on plane tickets currently earmarked for airport construction. There need be no net increase in money paid by the general public or through airline companies.
The incentive for airlines to exercise discretion in which landing slots they use results from the fact that an auction imposes a marginal cost for desirable slots. This does not depend on any overall increase in federal revenues from aviation.
Airlines, particularly large established ones that view the slots at key airports as a property right, dislike the idea of auctions just as much as commuters from the western suburbs dislike toll lanes on Interstate 394. In both cases, however, society would be better off if we implemented the measure.
Airlines and commuters are trapped in a “collective action problem.” If every airline that wants to fly out of O’Hare and every person who wants to commute on I-394 does so, congestion results. The congestion affects many people and the total loss of well being by those affected can be huge.
Often, not many airlines or drivers would have to stint or stay out to reduce congestion enough to benefit many. The cost to a few from not landing or driving during key times would be small compared to the benefit to many from fewer delays.
No single firm or driver, however, has any incentive to be the one to stint. If one airline gives up an O’Hare flight or one commuter seeks an alternate route, they give up something of value. Most of the benefits go to others. No market force provides an incentive for individuals to do something when the benefits go to a group as a whole.
Any mechanism that creates a financial incentive for some existing participants to drop out or to participate at a different time reduces congestion for many and makes society as a whole better off. Higher prices for landing slots at key times signal scarcity. They soon are passed along in higher ticket prices. Lower fares for off-peak hours tell the public to fly when the potential for congestion is less.
The same can happen with toll lanes. Higher prices during peak hours or for faster lanes separate those for whom time is important from those for whom it is not. Some individuals may feel that the system is unfair, but congestion and wasted time can drop sharply.
In the case of a major airport like O’Hare, congestion from trying to push too many planes through in a compressed time is not limited to just that airport. It spills over to connecting airports where takeoffs are delayed because O’Hare is stacked up. Establishing incentives to reduce demand for peak-hour landings and take-offs at O’Hare can benefit flyers hundreds of miles away.
Congestion pricing, like taxes on pollution, is a measure that the great majority of economists endorse and that the general public views skeptically. Eventually, such measures will be adopted. Our grandchildren will wonder what all the fuss was about.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.