Evaluating different pricing policies on social welfare: an application to Madrid Barajas

Abstract

In this paper, we assess the potential impacts of different airport charges schemes that can be applied in Madrid Barajas airport. We use a model that has already been applied in the literature to calculate the social welfare of the different price regimes. The term social welfare refers to the social welfare generated from only aeronautical services, while the social welfare created from non-aeronautical activities will not be discussed here. We define, as is common in the literature, that the social welfare is the sum of consumer surplus and producer surplus. We analyze the potential impact of different pricing policies using the values obtained on social welfare, and using the concept of ‘potential loss of social welfare’ when the lack of adequate capacity preclude the potential demand from using the airport. Thus, we evaluate the “losses” or “gains” of each alternative pricing policy. Our results may contribute to the ongoing debate in Madrid and around Europe about the merits of adjusting airport charges to different scenarios, e.g. congestion or lack of capacity or excess of capacity, in which airports are usually involved.