Market structure and environmental costs: An analysis of air transport liberalization

Abstract

In this paper, the effects of airline liberalization are analyzed taking into account the two distortions of market power and environmental damage. Parameter conditions that guarantee a positive welfare effect are derived; using empirical information, it is shown that one may expect a positive welfare conclusion with respect to airline liberalization in the fixed number duopoly case. Furthermore, non-cooperative taxation is compared with coordinated tax solutions. It is concluded that liberalization with taxation is always preferred to the case without taxation. Furthermore, I find that governments behaving strategically will generally not choose the welfare optimal tax. For low (high) environmental costs, the non-cooperative tax is too high (low), while the cooperative tax is negative (positive).