Pricing of Airport Services According to Principles of Welfare Economics

Pricing of Airport Services According to Principles of Welfare Economics


T Mathisen, F Jorgensen, G Solvoll, University of Nordland, NO


Marginal costs at Norwegian airports are derived for passengers and air traffic movements both in the short-run and long-run. Using the Ramsey-rule a taxation scheme is designed according to principles of welfare economics under budget restrictions.


The major part of the Norwegian airports is operated by the state owned company Avinor. These airports are operated commercially and do not require state subsidies. Revenues are almost evenly distributed between commercial activities (tax-free sales etc) and air traffic. Traffic revenues are generated from passengers (PAX), air traffic movements (ATM) and security, and from 2011 also separate fees for control tower services are introduced.

The Norwegian Ministry of Transport and Communication (MTC) initiated in 2010 a project to evaluate the taxation scheme that generates the traffic revenues. This paper presents the major results from this project. The aim is to achieve a taxation scheme that is: (1) better founded in principles of welfare economics; (2) meets the budget restrictions of no public funding of the airports and (3) is acceptable seen in the light of regional policy goals. The latter aim of the project also implies a discussion of cross-subsidizing between profitable airports located in the larger cities and unprofitable airports located in the rural regions of the country.

Empirical data and methodology
Accounting figures, airport properties and traffic data are gathered for all 46 Norwegian airports operated by the state owned company Avinor. Hence, the unit of analysis is at the airport level. Data is made available for the time period from 2007 to 2009 and thus providing a pooled data set of 138 observations for the quantitative analyses.

An econometric approach is applied using total costs as the dependent variable and well recognized independent variables such as the number of passengers and air traffic movements as production measures and terminal area and runway length as capacity measures for the airports. Moreover, a dummy is introduced to separate regional (small) airports with mainly subsidized routes (public service obligation) from main (large) airports with commercial flights.

The result of the project is a taxation scheme designed according to welfare maximizing principles. This means charging fees based on marginal costs adjusted according to the Ramsey rule to meet budget (revenue) restrictions. Marginal costs will be derived both in the long-run (capacity can be changed) and short-run (assuming fixed capacity). Hence, optimal taxes can be derived and differentiated for full capacity using the long-run estimates and free capacity using the short-run estimates.


Association for European Transport