Environmental Taxation in Airline Markets

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.