The problem is too many airplanes sharing too little space in the sky, giving New York the worst air congestion nationwide … To manage the congestion, Bush administration officials have grudgingly maintained caps on the number of flights per hour at the three airports — Kennedy, La Guardia and Newark Liberty — and have even added new caps, though such measures run counter to the White House’s pro-competition principles. Capping the number, officials complain, hinders competition by preventing new, upstart airlines from entering the market, and existing airlines from expanding operations. To mitigate the impact of the caps, the administration is now proposing to auction off some takeoff and landing slots to the highest bidder. The proposal has the support of New York Mayor Michael R. Bloomberg (I), but it has sparked an ideological battle over how far market controls should extend in the skies, attracting fierce opposition from figures such as Sen. Charles E. Schumer (D-N.Y.) and from the Port Authority of New York and New Jersey, which runs the three major area airports … The larger auction plan would compel major airlines to give up 10 percent to 20 percent of their takeoff and landing slots over time so that they could be put up for auction. “The resource is scarce and the best way to allocate it is a price mechanism,” said Tyler D. Duvall, the Transportation Department’s acting undersecretary for policy. “It’s part of a larger picture: We’ve got congestion on the roads, in our ports, in our airports,” Duvall added, outlining the wider policy of the current administration. In each of these cases, he said, the market can best clear the way. But others say auctions will do nothing to resolve the capacity problem, and could cause more confusion and incur more costs for customers than they relieve.
Greg supports the Bush-Bloomberg proposal and got an email from Hal Varian:
In your blog you cite a Washington Post article that says “But others say auctions will do nothing to resolve the capacity problem…” This isn’t quite right. In certain circumstances, the optimal congestion prices send the right signals for marginal capacity expansion. Hence expanding capacity by using the present value of the optimal congestion fees will result in thesocially optimal level of capacity. This is sometimes know as the Strotz-Mohring theorem
Varian co-authored a paper on Pricing Congestible Network Resources with Jeffrey K. MacKie-Mason:
Despite the simplicity of rationing and quotas, economists tend to favor pricing mechanisms as a way of alleviating congestion. One important feature of congestion prices is that they not only discourage usage when congestion is present, but they also generate revenue for capacity expansion. Indeed, it has long been recognized that under certain conditions the optimal congestion prices for a fixed amount of capacity will automatically generate the appropriate amount of revenue to finance capacity expansion.
The authors are careful to note that this conclusion assumes perfect competition with free entry as in Varian’s “certain conditions”. But do those conditions hold in this case?