The correct elasticity value to use in analysing an air transport policy decision depends on the type of question being asked. The impact on demand of higher travel costs on a given route due to a rise in airport landing charges requires a different (higher) elasticity than when examining the traffic impact of a wider travel cost increase due to a passenger tax on all routes in a country.
Air transport policy decisions run the risk of being ineffective, or even counter-productive, if the correct demand elasticity is not used. For example:
A revenue-raising policy to raise the price of travel • on a route (e.g. higher airport charges) will reduce passenger numbers more than expected if the price elasticity of demand is underestimated. A price elastic response to air travel price increases at the route level means that demand falls at a proportionately higher rate than the increase in price.
A national passenger tax may damage inbound • tourism more than expected if policy-makers do not take into account the greater price elasticity of overseas residents visiting the country, who have a choice of destinations, compared to outbound domestic residents who can either pay the tax or
not travel.
An environmental policy to raise the price of travel • (e.g. a national aviation tax) on a national or supra-national basis will be ineffective if the price elasticity of outbound travel is low, as found. A price inelastic response at the national or supra-national level means that the impact in terms of reducing demand will be proportionately less than the increase in price. The greater price sensitivity of inbound overseas residents will result in a diversion to other destinations, a “leakage of carbon”, and thus a reduction in environmental effectiveness.
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