Airport cities and social welfare

This paper is concerned with the development of airport cities and social welfare. We analyze a typical non-aeronautical service of an airport, namely, airport shopping malls, by using a novel model that incorporates an endogenous change in varieties sold at airport malls and their substitutability with downtown stores. Larger airports do have more varieties of shops whose space can be changed by development. Our main results show that, first, airport malls developed by a local government or a profit-maximizing airport are too large as compared to the socially optimal size, because either entity disregards a decrease in profit at downtown stores when deciding on the size of airport malls. Second, the planner can attain the social optimality with the use of Pigouvian subsidies, even if it delegates its decision making to a local government or a profit maximizing airport. Third, a local government or a profit-maximizing airport has an incentive to construct an airport that is too far away from downtown (or, has little incentive to improve airport access to/from downtown). The planner can nevertheless delegate its decision on airport location (or, airport access conditions) to either entity by using Pigouvian subsidies.