Managing airport capacity

This part of the book deals with what economists call externalities, defined as benefits or costs of trade incurred by someone who does not take part in this trade. Air pollution is a familiar textbook example of this. Someone living next to a factory, someone who does not work at the said factory, nor buys the products produced there (nor benefits from it in any other way) is still affected by air/water/soil pollution that this factory generates. The cost to that person can be real and tangible, taking the form of adverse health effects, or otherwise reduced quality of life. This is a problem because in a free market the factory owner does not take this pollution into account when making its production decisions. The factory owner makes decisions based on costs, and costs to the third parties are not costs to the factory owner. However, they are costs to the society as a whole. As a result, the factory's output ends up being higher than the socially optimal level. Some sectors in the economy produce external effects that are positive: education, for example, produces better citizens, reducing crime rates.

Congestion represents another kind of negative externality. At the basic level, congestion arises when adding a car to the traffic or a flight to the airport schedule slows down everyone else using the road or the airport. This creates real and tangible costs for other users (in the form of lost time, increased fuel consumption, etc.), which is not taken into account by the user making the decision to use the facility (road or airport).

Airport congestion has become an important policy issue. A study (NEXTOR 2010) suggested that a 10 per cent reduction in airline delays in the United States would raise net welfare in the US economy by almost $17.6 billion, while a 30 per cent drop in the number of delayed flights would result in a $38.5 billion increase in welfare. While just before the pandemic relatively few airports operated at or sometimes above capacity, the share of travellers affected by this issue was significant. Congested airports are typically large hubs handling a large share of passengers in the system. Also, airlines’ hub-and-spoke networks mean that congested airports form bottlenecks in the global network.