Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 24: Environmental Taxation in Airline Markets

Fredrik Carlsson ()
Additional contact information
Fredrik Carlsson: Department of Economics, School of Economics and Commercial Law, Göteborg University, Postal: Department of Economics., School of Economics and Commercial Law, Göteborg University, Box 640, SE 40530 GÖTEBORG

Abstract: Over the last two decades many airline markets have been deregulated, resulting in increased competition and use of different types of networks. At the same time there has been an intense discussion on environmental taxation of airline traffic. It is likely that an optimal environmental tax and the effects of a tax differ between different types of aviation markets. In this paper we derive optimal environmental taxes for different types of airline markets. The first type of market is a multiproduct monopoly airline operating either a point-to-point network or a hub-and-spoke network. The optimal tax is shown to be similar in construction to an optimal tax for a monopolist. We also compare the environmental impact of the two types of networks. Given no differences in marginal damages between airports we find that an airline will always choose the network with the highest environmental damages. The second type of market we investigate is a multiproduct duopoly, where two airlines compete in both passengers and flights. The formulation of the optimal tax is similar to the optimal tax of a single product oligopoly. However, we also show that it is, because of strategic effects, difficult to determine the effects of the tax on the number of flights.

Keywords: Environmental taxation; Multiproduct duopoly; Aviation; Networks

JEL-codes: D62; L13

23 pages, May 31, 2000

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Published as
Fredrik Carlsson, (2002), 'Environmental Charges in Airline Markets', Transportation Research, Part D, vol 7, pages 57-73

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