Estimating the Costs and Benefits of Regional Airport Subsidies: A Computable General Equilibrium Approach

Abstract

Subsidies to airports have become a controversial issue, especially in Europe since liberalisation of air transport. Regions seek to increase economic activity by subsidising local airports, enabling them to win more traffic, especially from low cost carriers. These subsidies do have an efficiency cost, in that they induce airlines and passengers to use less preferred airports. However they can lead to an increase in economic activity within a region, for example from tourism, and the region can gain from this. The most commonly used method of estimating regional impacts is Input-Output analysis- this tends to produce estimates of large impacts on economic activity. Very often the assumptions underlying Input-Output models are not met however. In this paper, a regional and national computable general equilibrium (CGE) model is used to estimate both the regional and national impacts on economic activity of airport subsidies. The model also enables the net benefit from this change in economic activity, at the regional and national level, to be estimated. The research indicates that it is possible for a region to enjoy economic gains as a result of an airport 3 subsidy, even though the nation as a whole is likely to lose, though not in all cases, since economic activity is shifted, and not necessarily increased overall. This poses a difficult problem for governments in developing policies towards subsidies offered to regional airports. Keywords:

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