Kristian Niemietz is a Senior Research Fellow at the Institute of Economic Affairs and author of  Depoliticising Airport Expansion, released today.

Tomorrow, the Airports Commission will publish its shortlist, selected from more than 50 initial proposals for airport expansion plans. There has been a lot of speculation about which options the Commission is likely to choose, and what the political ramifications will be.

As a free-market economist, though, I am not especially interested in which proposals will make it to the shortlist. Rather, I have reservations about the whole idea of having a government commission evaluate business plans. We would not approach investment decisions in any other sector in this way. If demand for beer goes up, and breweries need to install new brewing coppers, we would not set up a “Brewery Commission” to go through the business plans of the brewers.

There should be no Airports Commission. We should get the national government out of airport investment decisions altogether. But in order to do this, we need to find a mechanism which enables airport operators to reach an agreement with the residents affected by aircraft noise.

The fundamental problem in the current system is that decisions on airport expansion are winner-takes-it-all decisions. Airports want to build as many runways as possible. They have everything to gain from expansion, and nothing to lose from it. Most local residents subject to aircraft noise, in contrast, would prefer no expansions whatsoever. They have nothing to gain from expansion, and everything to lose from it.

Thus, there is scope for what economists call a “Coasean solution”: If an economic undertaking produces both winners and losers, and if the gains to the winners exceed the loss to the losers, then the former should compensate the latter. They should have to “buy” the right to carry out the undertaking from those who suffer the side-effects. In this way, the gains would be more evenly shared, and all parties involved would be encouraged to work out a solution that works for all sides. In the case of airport expansion, a Coasean solution would discourage airport operators from riding roughshod over the concerns of local residents, but it would also discourage residents from all-out obstructionism.
Coasean solutions always look highly attractive in economics textbooks and on the blackboard. But are they workable in practice? How could a compensation mechanism operate without incurring huge transaction costs?

In my paper “Depoliticising Airport Expansion”, I outline a proposal for a near-Coasean solution to the airport capacity issue. The basic idea is simple. Airport operators that plan to expand would have to offer a compensation payment to the residents affected by the ensuing increase in aircraft noise. Those local residents, not politicians, would then get to decide, via a referendum, whether or not the airport should be allowed to proceed.

Since airport operators would want to win the referendum, they would face strong incentives to study public opinion in detail, and work out what exactly it is that residents are most opposed to. Are they, for example, most troubled by noise in the early morning hours, by noise in the late evening hours, by peak noise levels, or by the overall duration of noise exposure? If a pattern can be identified, it could be worked into the referendum proposal, to increase its chance of success. The proposal could then, for example, contain a binding commitment to ceasing airport operations earlier at night, starting them later in the morning, or excluding the noisiest planes.

It is worth mentioning that no such roundabout mechanism would be needed if the UK simply adopted a more decentralised tax system more generally. If local councils around airports could keep most of the tax revenue generated at and around airports, there would be much less opposition to expansion proposals. The areas around airports would then become “tax havens”, where the airports would account for a large chunk of the local tax revenue, which means that the tax burden on residents could be eased commensurately. A Swiss-style tax system automatically incorporates Coasean elements into decisions on infrastructure and related matters.

Either way, it is time to continue the great free-market success story which was the liberalisation of air travel, by shifting the capacity issue to the sphere of market exchange. In this way, airport expansion could be turned into a win-win situation.