Cross-Subsidies in Aeronautical Services and the Airport Network of Chile

Abstract

This paper investigates the structure of tariffs in civil aviation in Chile and the potential cross-subsidies that it generates. We estimate the cross-subsidies that currently exist in this transport network and find that the current tariff structure generates a number of cross subsidies between airports. In particular, the airports of La Serena, Punta Arenas and Easter Island receive a cross subsidy from the rest of the network. We suggest that it may be beneficial to impose that airports in Chile must fund all their incremental costs. The intuition for this result, which follows from an old idea presented by Adam Smith, Coase and Vickrey, among others, is that the self-financing of airports, or at least of their incremental costs, can be an effective mechanism to prevent overinvestment in infrastructure. In the light of this discussion and the results found in this study it would be advisable to review the structure of aeronautical tariffs in Chile.