1 Comments on “The Price of Silence: Markets for Noise Licenses and Airports” Jon Nelson Pennsylvania State University

2 Addressing Noise Externality Problems Three General Policy Instruments for Internalization –Regulations, Noise Charges, & Tradeable Permits –Basic Problems – Need a way to select & prioritize alternative strategies, but this involves information costs. Instruments also affect incentives of stakeholders. Regulations (Command-and-Control) –Source abatement – quieter aircraft (but offset by growth of flights) –Operational changes – flight paths, curfews –Receptor changes – insulation, direct compensation –Land use changes – purchase of land, zoning (> 65 DNL) Cost-Benefit Analysis of regulations – U.S. examples –Early work on quieter aircraft – DeVany et al. (1977), Nelson (1978) –Recent studies – Morrison et al. (1999), MIT-FAA PARTNER study (2006) –Expansions -- Swoveland (1981), Cohen & Coughlin (2003), McMillen (2004) U.S. capacity expansions –FAA requires a CBA, but externalities are NOT part of the analysis –St. Louis expansion, homeowners were offered three options: sales assistance, sound insulation, or a cash payment. Airport received an “aviation easement.”

3 Noise Charges Noise Charges (“taxes”) – based on marginal damage costs –Early studies: Alexandre & Barde (1974), Nelson (1978), Harrison (1983) –Recent studies: Pearce & Pearce (UK, 2000), Carlsson (Sweden, 2002), Nero & Black (Sydney, 2000), Hsu & Lin (Taiwan, 2005), Brueckner (2003), etc. Charge should be related to noise emissions and related damages, i.e., the noise profile and no. of people affected –Noise-related charges have been imposed at several airports, but the charges have little or no linkage to annoyance or other damage measures, e.g., Tokyo Haneda, Frankfurt, UK (Manchester, Gatwick, Heathrow, Luton, Stansted), Amsterdam Schipol, Paris ( ), Switzerland, etc. –Optimal landing fees also account for marginal damage costs of aircraft delay, e.g., Levine (1969), Morrison & Winston (1989, 2000), Brueckner (2002) Advantages –Externalities are internalized –Revenues are available for noise insulation, etc. –Price or cost faced by airlines is known with some certainty –Incentives for innovation

4 Tradeable Permits –Tradeable permits for noise emissions -- mentioned by several observers, but serious analyses has been mostly limited to permits for landing slots. –Other studies (?): Brough, Clarke, & Tideman (1994, Transportation Research Record), which also incorporates tradeable permits for noise. Working paper on Ed Clarke’s web site. Nelson (1978) for a fleet-noise cap & trade “model.” The Price of Silence: Markets for Noise Licenses –A first application of Coase’s (1960) model on social costs to aircraft noise –Recognizes the reciprocal nature of extermalities –Avoids (?) the problem of collecting info on noise damages –Fixes the maximum quantity, but market determines the price Details of Market Design: –Zones – each zone holds licenses for overflight during some time period, so supply is set by number of zones set by manager and no. of time periods –Critical Zone – zone with the highest disutility, which offers the smallest no. of licenses and thus determines the number of flights over a route –Increase No. of routes – reduces price & raises total flights –Increase No. of zones on a route (critical zone unchanged) – price rises –Increase No. of zones (& reduce size of critical zone) – price falls

5 Market Planner’s Role Manager’s Preferences – a key feature is the taste parameter (  ) –Weight placed by the planner on benefits of airport economic activity compared to the disutility of noise pollution. In theory, maximize sum of unweighted surpluses to consumers and producers, such that marginal profit = marginal external cost. –This is an very interesting aspect of the paper, since it mirrors what actually occurs in practice: Why is the critical noise level set at 65 DNL? Why the resistance to Benefit-Cost Analysis of noise mitigation? Why is the focus so much on quieter aircraft? Stigler-Peltzman Theory of Regulation –Economists know a good deal about the empirical side of regulation and indirectly about the objective functions of regulators –This paper contains a market model where the result need not be a pure socially- efficient outcome, but restricted outcomes are possible, e.g., Weight on airport economic activity Exogenous determination of noise zones