Choice of Policy Instruments with Endogenous Quality: Per‐Passenger and Per‐Flight Airport Charges in Japan*

Abstract

This study empirically investigates how two types of airport charges (per‐passenger and per‐flight) differentially affect airfares, service quality (flight frequency), and welfare. A structural model endogenizing airfares and flight frequency is estimated with data on Japanese domestic routes and then used for simulation analyses. The results reveal that per‐passenger charges significantly raise airfares, with an average pass‐through rate of 97.5 per cent, and reduce flight frequency. Per‐flight charges decrease flight frequency but have little effect on airfares. The socially preferred type of charges differs across routes: per‐passenger charges tend to be socially preferred on larger routes.