Airport Privatization and Regulation: Effects on Airport Charge, Capacity, and Social Welfare

Abstract

This paper examines airport privatization and various forms of airport regulation, taking into account of behavior of public administration and non-aeronautical service of an airport. First, we find that the regulator may set the price of non-aeronautical service lower than its marginal cost in order to counteract a high airport charge, if it can regulate non-aeronautical service. Second, price-cap regulation on aeronautical service could reduce airport charge, but also introduce an underinvestment in airport capacity that could lower social welfare. Whether price-cap or cost-based regulation is superior depends on the relative importance of the underinvestment effect under price-cap regulation, versus a regulatory waste associated with cost-based regulation.