Wednesday, July 22, 2009

Air Passenger Tax

The outspoken chief executive of Ryan Air, Michael O'Leary, has slammed the governments Air Passenger Duty tax, which will go from £10 to £11 in November. He cites this as a major reason for reducing the number of flights from Stanstead. He claims the tax is unfair and bad for the airline industry.

We could say there is a certain hypocrisy in the Ryanair approach. After all they are the masters of adding extra charges, such as charges for buying with credit card, charges for extra bags e.t.c.

Ryanair defend their charges by saying they encourage more efficient flying. I agree. I think it is an excellent way to charge passengers. It means you don't pay for meals you don't like. It means you don't pay for wine you don't want to drink. It encourages people to check in online and reduce baggage. It is an admirable business model and an economist would like the way it increases allocative efficiency by charging according to the marginal cost of extras.

However, the target of an airline tax is to also encourage greater social efficiency. Flying has significant negative externalities to society. Global warming from pollution, noise pollution e.t.c. Therefore, this pigovian tax is a way of making people pay the social cost of flying. Given externalities involved in airline travel, I think you could make a good case for saying the airline tax should be significantly higher.

Unfortuantely, many other European countries have dropped the tax, which means they are free riding on the UK's attempt to reduce global warming by properly pricing airline flights. But, just because other countries do the wrong thing doesn't mean we should give into bulling by the air industry.

BTW: I will be away next week. I am flying to Ireland (by Ryanair of course) for a cycling holiday. The actual flight cost about £10. But, I ended up paying over £100, which included £60 for the privilige of carrying a bike! Good old Ryanair!



supernova said...

I wish you a pleasant stay in ireland.

Tejvan Pettinger said...