Optimal structure of air transport services when environnemental costs are taken into account

Abstract : The consequences of environmental taxation on the supply of air transportation services by a profit-maximizing monopolist are examined. We consider both a passenger related tax and an aircraft related tax, highlight their respective impact on prices and frequency and derive their optimal combination. It is shown that there is a trade-off between the recovery of environmental damages and the distortions created by the tax. If tax can be negative. i.e. if the air transportation industry can be subsidized, it is possible to decentralize the optimal situation. We establish the optimal taxation system in a more realistic setting where taxes are to be positive and the ATM costs have to be recouped. To conclude we question the opportunity and the ability of (direct) regulatory mechanisms to address these issues in substitution and/or in addition to (the indirect action of) a fuel tax.