A market solution to the third runway

You have to have some sympathy for Zac Goldsmith, whatever you think of his politics. He clearly has principles and grit. Resigning over the Government’s plans for a third runway at Heathrow was his promise. Now he has delivered. Other politicians have a lot to learn.

Expanding airport capacity is long overdue. London is a growing and global city. As Sam argued yesterday, the government might also want to approve a new runway at Gatwick. Why not the Boris island too?

I have spent most of my life in Richmond, so I am also very sympathetic for residents. This is where Sam and I disagree. But, I think there is a simple solution. Markets.

Welfare economics 101 tells us that many activities have externalities. Costs that affect a party who did not choose to incur them. This means the air travel market does not reflect its full social costs. For example, Pearce & Pearce estimated that noise nuisance at Heathrow results in £37-66 million p.a. in uncompensated losses.

Governments often respond to these challenges by trying to ‘internalise’ the externality. Pigou’s solution is most common - applying a tax that is 'equal' to the cost of the externality.  (Yes - there are many flaws to this approach, covered well elsewhere!).  

Flights in the UK are taxed already. These include air passenger duty, passenger service charges, and sometimes value added taxes. The air passenger duty is supposedly intended to offset environmental costs. The airlines, airports and their employees also face a range of taxes. Perhaps more taxes isn’t the best answer.

A simple solution would be take a cut of the revenues raised by air passenger duty and give it directly to those affected as compensation. An independent not-for-profit institution could make yearly evaluations of the harm caused.

The more sophisticated solution would be to create an actual market. Residents would be granted a right to silence, and a share of tradeable noise permits. The marketplace would be neutral and managed automatically by software.

This solution does not require regular evaluations. It is not expensive to manage. It isn't biased towards businesses nor does it give them too much power. It avoids drawn out legal disputes. It could even be set up without political direction.

A tradeable pollution market moves the real world much closer to the Coase theorem. With clear property rights (for air corridor residents), and low transaction costs (with a simple trading platform), both sides can bargain to a balanced outcome.

This market would allow the third runway to proceed, with extra flights, and provide compensation to those harmed. All without too much hassle for May’s government and further delays for travellers.