Forms of Airport Regulation and Privatization : Effects on Airport Charge, Capacity and Welfare

This paper examines forms of airport regulation and privatization, taking into account of behavior of public administration and both the aeronautical and non-aeronautical services. We find that with higher costs associated with public operations, a public airport cannot be identified as a welfare-maximizing body. Whether the partial or full privatization is socially superior depends on the extent of efficiency gains and regulation, as well as the regulatory forms. Full privatization of both aeronautical and non-aeronautical services can, owing to cost reductions to a fuller extent, attain higher social welfare than partial privatization. However, a full privatization without regulation yields a monopoly and related distortions. A full privatization with price cap regulation on aeronautical service could decrease airport charge, but also introduce an underinvestment in airport capacity which could lower social welfare. Finally, regarding the form of airport-pricing regulation – price cap vs. cost-based regulation – which one is superior depends on the relative importance of the underinvestment effect under price cap regulation, versus a regulatory waste associated with cost-based regulation. Cost-based regulation (price cap regulation) is better at a congested (non-congested) airport, because the underinvestment effect is a more (less) serious concern than the regulatory waste