The Third Runway Expansion at
Hong Kong International AirportIssues and Economic Analysis
M Fung and CK Law
Aviation Policy and Research Centre
CUHK
•
•
•
•
•
Global Aviation Market
Air Transport Industry in Hong Kong
Third Runway Expansion
Issues and Economic Applications
Teaching and Learning Materials
Global Aviation Market
Global flows in a digital age: How trade, finance, people and data connect the world economy, McKinsey
Global Institute, 2014.
IATA Traffic Flows Between Regions
in 2011
Percentage of Total Scheduled Revenue Passenger-Kilometres
Source: IATA Watts (published in 2012), IATA Financial Forecast March 2013
Year 2012 Air Traffic
Distribution Matrix
RPKs
Asia Pacific
North America
Europe
Middle East
Latin America
Africa
Asia Pacific
59%
15%
16%
37%
1%
6%
North America
14%
50%
23%
9%
34%
4%
Europe
16%
22%
36%
31%
30%
51%
Middle East
10%
3%
9%
14%
-
18%
Latin America
-
10%
9%
-
35%
-
Africa
1%
1%
7%
9%
0%
20%
Total traffic to
and from
region
100%
100%
100%
100%
100%
100%
Source: Boeing 2013
Regional Distribution of Airport
Passenger Traffic by World Regions in
2006 vs. 2011
2006
Middle East
3% (0.11 bn)
2011
Africa
3% (0.11 bn)
Africa
Middle East
3% (0.15 bn)
4% (0.22 bn)
Latin America
6% (0.28 bn)
Europe
31% (1.35 bn)
Latin
America
7% (0.41
bn)
Europe
29% (1.57 bn)
North
America
28% (1.53 bn)
North
America
35% (1.53 bn)
Asia Pacific
22% (0.98 bn)
Source: ACI Worldwide Airport Traffic Report 2007 & 2012
Asia Pacific
29% (1.56 bn)
Top 12 Airports by Passengers
(Millions) in 2006 and 2012
Source: ACI Worldwide Airport Traffic Report
Top 12 Airports by Cargo (Tonnes)
Handled in 2006 vs. 2012
Source: ACI Worldwide Airport Traffic Reports
Global Growth in Passenger Traffic
and GDP
Source: ICAO for traffic growth, IMF for GDP (PPP)
Airbus Air Traffic Forecasts –
Largest Origin & Destination Flows in 2032
Source: Airbus (2013)
Net Profit/Loss and Revenues for World
Commercial Airlines (1978-2010)
Source: ICAO, IATA
Historical Prices for Crude Oil
and Jet Fuel
Source: Boeing (2013) and EIA
Energy Intensity of
New Aircraft Models
Source: IATA (2013)
Passenger Numbers by
Airline Business Models 2003 – 2012
Note: Share by top 200 passenger airlines
Source: Airline Business, August 2013
Financial Returns of Different
Airline Business Models (2010)
Source: Airline Business, August 2011
Accumulated Net Losses and Gains of
Legacy and Low-Cost Airlines in US
Source: The US DOT (2012)
Alliance Membership as of July 2012
Source: Websites of Star, SkyTeam and Oneworld
Top 20 Airlines by Passenger Traffic
(RPKs) in 2012
Source: Airline Business, August 2013
Scheduled Freight Tonne - Kilometres 2012
Domestic
International
Rank
Airline
Millions
1
2
3
Emirates
9,319
Cathay Pacific Airways 8,433
Korean Air
8,099
4
FedEx
7,787
5
Lufthansa
7,170
6
Singapore Airlines
6,694
7
British Airways
5,452
8
UPS Airlines
4,728
9
China Airlines
4,538
10
EVA Air
4,470
Source: IATA World Air Transport Statistics 57th Edition
Rank
Airline
Millions
1
2
3
FedEx
UPS Airlines
China Southern
Airlines
Air China
8,321
4,964
1,333
4
5
6
7
8
9
10
Polar Air Cargo
Hainan Airlines
All Nippon Airways
United Airlines
Shenzhen Airlines
American Airlines
990
480
446
428
391
389
343
Air Transport Industry in HK
Market Data
Aircraft Movements of Local and Foreign Airlines
(2001-2012)
Source: HKAA (2013)
Aircraft Movements of HK’s Local Airlines
(2001-2012)
Source: HKAA (2013)
Air Passenger Throughput of HKIA and
for Local and Foreign Airlines (1997-2012)
Source: HKAA (2013)
Air Passenger Throughput of HK’s Local Airlines
(2001-2012)
Source: HKAA (2013)
Connecting Traffic for Local and Foreign Airlines
(2001-2012)
Source: HKAA (2013)
Connecting Traffic Handled by HK’s Local Airlines
(2001-2012)
Source: HKAA (2013)
Key Air Passenger Markets of HK (2001-2012)
Source: HKAA (2013)
Air Cargo Throughput of
Local and Foreign Airlines (2001-2012)
Source: HKAA (2013)
Air Cargo Throughput of HK’s Local Airlines
(2001-2012)
Source: HKAA (2013)
Key Air Cargo Markets of HK (2001-2012)
Source: HKAA (2013)
Cathay Pacific Frequencies Per Week
(Summer Schedule 2014)
Destination
Frequency
per week
Destination
Frequency
per week
Destination
Frequency
per week
Destination
Frequency
per week
Adelaide
4
Denpasar
9
Manila
42
Sapporo
4
Amsterdam
7
Dubai
14
Melbourne
21
Seoul
42
Auckland
14
Frankfurt
7
Milan
7
Shanghai
21
Bahrain
7
Fukuoka
7
Moscow
3
Singapore
63
Bangkok
59
Ho Chi Minh
city
16
Mumbai
10
Surabaya
7
Beijing
14
Hyderabad
4
Nagoya
21
Sydney
28
Brisbane
11
Jakarta
21
New York
35
Taipei
106
Cairns
4
Johannesburg
7
Osaka
35
Tokyo
42
Cebu
7
Karachi
4
Paris
14
Toronto
10
Chennai
7
Kuala Lumpur
28
Perth
10
Vancouver
14
Chicago
10
London
35
Riyadh
5
Colombo
7
Los Angeles
28
Rome
7
Delhi
14
Maldives
4
San Francisco
14
Source: Cathay Pacific System Timetable for Summer Schedule 2014,
Cathay Pacific Press Release (2014)
Note: The data was as on 2 September 2014.
Dragonair Frequencies per Week
(Summer Schedule 2014)
Destination
Frequency
Destination
Frequency
Destination
Frequency
Beijing
56
Haikou
7
Phuket
14
Bengalore
7
Hangzhou
28
Qingdao
14
Pusan
7
Hanoi
10
Sanya
5
Changsha
7
Jeju
4
SHA
7
Chengdu
14
Kaohsiung
38
PVG
91
Chiang Mai
7
Kathmandu
6
Siem Reap
4
Chongqing
7
Kolkata
5
Taichung
14
Clark
3
Kota Kinabalu
7
Taipei
12
Da Nang
7
Kunming
7
Wenzhou
7
Denpasar Bali
2
Manila
5
Wuhan
10
Dhaka
6
Nanjing
14
Xiamen
28
Fukuoka
7
Ningbo
14
Xian
7
Fuzhou
14
Okinawa
4
Yangon
4
Guangzhou
14
Penang
8
Zhengzhou
7
Guilin
7
Phnom Penh
10
Source: Dragonair System Timetable for Summer Schedule 2014
Note: The data was as on 5 September 2014.
Hong Kong Airlines Frequencies Per Week
(Summer Schedule 2014)
Destination
Frequency
per week
Destination
Frequency
per week
Beijing
28
Guiyang
7
Bangkok
35
Haikou
7
Chengdu
7
Hangzhou
21
Taipei
28
Chongqing
7
Hanoi
7
Taiyuan
2
Denpasar
14
Nanjing
14
Tianjin
5
Fuzhou
14
Nanning
7
Xiamen
6
Guilin
7
Sanya
7
Xuzhou
2
Source: Hong Kong Airlines Timetable for Summer Schedule 2014
Note: The data was as on 5 September 2014.
Destination
Shanghai –
Pudong
Shanhai Hongqiao
Frequency
per week
21
7
Hong Kong Express Frequencies Per Week
(Summer Schedule 2014)
Destination
Frequency
per week
Destination
Frequency
per week
Busan
6
Osaka
14
Chiang Mai
3
Penang
7
Fukuoka
7
Phuket
4
Incheon
17
Quanzhou*
4
Kota Kinabalu
4
Taichung
14
Kunming
3
Tokyo-Haneda
7
Nagoya
6
Zhengzhou^
5
Ningbo
7
Source: Hong Kong Express Timetable for Summer Schedule 2014
Note: The data was as on 5 September 2014.
Air Transport Industry in HK
Economic Contribution
Total Value Added by HK’s Aviation Sector
(2005-2011)
Source: HK Census and Statistics Department
(2013)
Proportion of the Workforce Engaged in HK’s
Aviation Industry (2005-2011)
Source: HK Census and Statistics Department
(2013)
Air Transport Industry in HK
A5 in the PRD Region
Five Major GPRD Airports
Source: HKAA (2011)
Selected International Destinations Connected to
Airports in the PRD Region—Hong Kong
Region
Destinations
Frequency
per week
(Passenger)
Frequency
per week
(Cargo)
Asia
Bangkok*
183
13
Seoul
157
30
Singapore
163
23
Taipei
298
49
Australia
Sydney
35
3
Europe
London
56
2
North
America
Los Angeles
28
22
New York
28
7
Vancouver
21
0
• Number of destinations for scheduled flights at March 2014: 180
• Newly added in 2014 for passenger flights: Dallas, Seattle and
Kagoshima
Source: HKAA Annual Report (2013-14), webpage of HK Airport (2014)
Data from 4-10 October for passengers, 6-12 October for cargo
*Bangkok includes 2 airports: Bangkok and DMK
Selected International Destinations Connected to
Airports in the PRD Region—Guangzhou
•
Region
Destinations
Frequency
per week
(Passenger and Cargo)
Asia
Bangkok*
101
Seoul
73
Singapore
76
Taipei
40
Australia
Sydney
54
Europe
London
7
North America
Los Angeles
15
New York
5
Vancouver
7
Number of destinations for scheduled flights in 2013: more than 160
cities (Domestic and international)
Source: Webpage of Guangzhou Baiyun Airport (2014)
Data from 4 -10 October
*Bangkok includes 2 airports: Bangkok and DMK
Selected International Destinations Connected to
Airports in the PRD Region—Shenzhen
Destination
Frequency per week
(Passenger and cargo)
Bangkok*
26
Seoul
30
Singapore
25
Taipei
22
• Number of destinations for scheduled flights: 107 (Domestic: 92, HKMacau-Taiwan:4, international: 11)
Source: Webpage of Shenzhen Baoan Airport (2014)
Data from 4 – 10 October
*Bangkok includes 2 airports: Bangkok and DMK
Daily Frequency of Destinations in the Mainland
by Two Airports
Destination
Beijing
Shanghai
(Pudong and
Hongqiao)
Hangzhou
Hong Kong (HKG)
22
43
9
Shenzhen (SZX)
34
49
21
Airport
Source: Webpages of HK International Airport and Shenzhen
Baoan Airport (2014)
Sample day: 24 October 2014
Figures include passenger and cargo direct flights only.
Selected International Destinations
Connected to Airports in the PRD Region—Macau
Destination
Frequency per week
(Passenger)
Bangkok*
49
Seoul
21
Singapore
14
Taipei
77
• Number of destinations for scheduled flights: 37
(Mainland and Taiwan: 23, international: 14)
Webpage of Macau Airport (2014)
*Bangkok includes 2 airports: Bangkok and DMK
Data on 4 October provided by Macau Airport
Key International Destinations Connected to
Airports in the PRD Region—Zhuhai
• No international routes
• Number of domestic destinations: 41
Webpage of Zhuhai Airport (2014)
Planned Developments of Airports
in the Region
Source: HKAA (2011)
Handover Points Between the HK and Guangzhou
Flight Information Regions
Source: HK Government
The Third Runway Expansion
Global Air Traffic versus Economic Growth
Source: HKAA (2011)
A Structured Air Traffic Demand
Forecast Process
Source: HKAA (2011)
Great Pearl River Delta Airports Passenger
and Cargo Traffic Forecast
Source: HKAA (2011)
HKIA Air Traffic Movement Projection
(Up to 2030)
Source: HKAA (2011)
HKIA Passenger Traffic Projection
(Up to 2030)
Source: HKAA (2011)
HKIA Cargo Traffic Projection
(Up to 2030)
Source: HKAA (2011)
Traffic Forecasts from
Boeing and Airbus
Source: HKAA (2011)
Two-runway System:
Airport Layout Plan in 2030
Source: HKAA (2011)
Base Case Constrained
Air Traffic Movement Forecast
Source: HKAA (2011)
Base Case Constrained
Passenger Traffic Movement Forecast
Source: HKAA (2011)
Base Case Constrained
Cargo Traffic Movement Forecast
Source: HKAA (2011)
Three-runway System:
Airport Layout Plan in 2030
Source: HKAA (2011)
Cost and Benefit Flows of Option 1
Source: HKAA (2011)
Cost and Benefit Flows of Option 2
Source: HKAA (2011)
Summary of the Economic Impact Analysis
Source: HKAA (2011)
HKIA—Financing of 3rd Runway
and Slot Allocation
Dr CK Law, Director of Policy
Aviation Policy and Research Center
CUHK (31/10/2014)
68
Content
•
•
•
•
•
•
(a) Financing Options for the 3rd Runway
--Original Financing Plan
--HKAA Proposal for 3rd Runway
--User-pay Principle—China
--User-pay Principle—US
--Passenger Surcharge for HK
69
Content
•
•
•
•
•
•
(b) Slot Allocation
--IATA Principle of Slot Allocation
--London Airports—Slot Trading
--US—Slot Trading and Proposed Slot Auctions
--Current Cases of Slot Auctions
--Lessons for HK
70
Original Financing Plan for HKIA
(a) In the 1991 financing arrangement of HKIA:
--direct equity injection by HK Government:
HK$36 billion;
--maximum debt from borrowing (for first phase
development works): HK$11.6 billion.
(b) So this was a financing package of about 75%
equity and 25% debt (user-pay principle was not
implemented).
71
HKAA’s Proposed
Financing Sources for 3rd Runway
Proposed Financing Sources
(a)
Net income and retained earnings of HKAA
(b)
Reducing the ratio of dividend payment to the HK Government , using the extra
cash for construction, plus other forms of direct government funding
(c)
Using user-pay-principle to collect a surcharge from users
(d)
Arranging traditional bank loans and issuing bonds
Source: HKAA (2011)
72
Financing Options under the
User-Pay Principle—China
(a)
In March 2012, Ministry of Finance in China issued a notice
about Civil Aviation Development Fund (《民航發展基金
徵收使用管理暫行辦法》).
(Domestic air passengers have to pay RMB 50 per movement,
international air passengers have to pay RMB 90 per movement
(including RMB 20 for Tourism Development Fund).)
(b)
Air carriers also have to pay for Civil Aviation Development
Fund according to the maximum take-off weight of aircrafts,
flying distances and routes.
73
Financing Options under the
User-Pay Principle—the US
(a) The PFC programme authorises the Federal Aviation
Administration (FAA) to allow airports to impose fees on
passengers to finance airport development projects and
planning as defined in the law.
(The PFC could be imposed at a level of US$1, US$2, US$3, US$4 and
US$4.50 per passenger.)
(b) For example: Chicago O’Hare International Airport: FAA
permitted US$6.4b PFC to be collected up to 1/1/2038
(about 43% of estimated total cost for airport expansion, at
US$15 billion).
74
User-pay Principle for 3rd Runway
--Additional Passenger Surcharge (1)
(a) Can be levied similar to the existing framework of passenger
departure tax (HK$120 per passenger, HK$2.2b tax revenue
for 2013).
(b) Air passenger departure tax is for the general revenue
purpose, but not for the construction of HK airport.
(c) Assuming 20 million passengers would pay this surcharge
annually at HK$100 each, the total revenue would be HK$2
billion a year.
(d) A 20-year programme, e.g. from 2016 to 2035, would easily
yield HK$40 billion at 2013’s money.
75
User-pay Principle for 3rd Runway
--Additional Passenger Surcharge (2)
(e)
A charge can be levied under “Scheme of Airport Charges”
in HK Law Chapter 483 by HK Airport Authority.
(f)
Currently, a terminal building charge is in effect (HK$23 per
non-transit passenger), which is levied on air carriers. This
charge would require the approval of the Chief Executive,
but not LegCo.
76
Recommended Funding Sources for
HKIA’s 3rd Runway
Funding sources
HKAA
internal
capital
Government
direct
funding
User-pay
Principle
Borrowing
Total
HK$ (billion)
20 - 30
27 - 35
35 - 45
35 - 45
136
Percentage (%)
15 - 22
20 - 26
26 - 33
26 - 33
100
77
IATA’s Principles of Slot Allocation
(a) According to the latest estimation by HKIA, the current capacity of
420,000 flights per year would be reached by 2016/17. We are
running out of slots sooner than expected.
(b) 4 major cornerstones in IATA Worldwide Slot Guidelines are :
– certainty of access;
– flexibility to mix and match slots to meet operational challenges and
changing market needs;
– sustainability of costs; and
– transparency of allocation
(c) 4 major principles:
–
–
–
–
Historic slots
Changes to historic slots
Slot pool
New entrants
Source: IATA (2013)
78
Congestion as Negative Externality
MCS
Price
MCP
B
PS
A
C
PP
D
MB
QC
Source: Figure 1 adapted from Cohen et al. (2009)
QS
QP
Quantity of
flights
London Airports—
Slot Trading (1)
(a) Heathrow Airport and Gatwick Airports are “Level 3” Airport
(HKIA as well) under IATA classification.
(b) For most of the time, the demand of runway movement
exceeds the capacity of runway movement.
(c) Airport Coordination Limited (ACL) as the independent
airport coordinator, which is monitored by Civil Aviation
Authority.
(d) In Summer 2014, air transport movement cap for two
runways was about 85 movements per day.
Source: IATA (2013), ACL (2014)
80
London Airports—
Slot Trading (2)
(e)
(f)
(g)
Currently, slots are traded in the secondary market (Online
Platform: slottrade.aero), monitored by CAA. The objective
is to improve the efficiency of slot utilization.
ACL is responsible for facilitation of trading slots by
providing the online platform.
Airlines are the main participants for bilateral negotiations
in the trading.
Source: slottrade.aero (2014), ACL (2014)
81
London Airports—
Slot Trading (3)
(h) Usually, the price for slot trading is confidential. (ACL asks
airlines to disclose the price on a voluntary basis).
(i) In 2013, two deals valuing Heathrow slots about GBP 15
million per daily pair according to news.
(j) In the Summer 2012 season, there were 23 transactions,
involving 122 slots-per-week traded (just above 1%, total
slots-per-week allocated was 9,524, about 1,360 flights per
day). Many valuable slots were traded in earlier years
already.
Source: slottrade.aero (2014), ACL (2014), CAPA (2013)
82
Trading Volume of London Heathrow and
Gatwick Airport from S08 to S12
Airport
Season/
Year
LHR (Heathrow)
Number of
Slots-per-
transactions week traded
LGW (Gatwick)
Total slots- Percentage of
per-week
slots-per-
allocated
week traded
Number of
Slots-per-
transactions week traded
Total slots- Percentage of
per-week
slots-per-
allocated
week traded
S08
17
220
9,482
2.32%
28
194
6,060
3.20%
W08
17
244
9,271
2.63%
8
113
4,267
2.65%
S09
15
313
9,512
3.29%
11
264
5,758
4.58%
W09
10
409
9,280
4.41%
5
267
4,242
6.29%
S10
18
435
9,524
4.57%
9
246
5,658
4.35%
W10
18
265
9,280
2.86%
3
43
4,857
0.89%
S11
11
156
9,524
1.64%
4
77
5,575
1.38%
W11
6
248
9,305
2.67%
0
0
4,135
0.00%
S12
23
122
9,524
1.28%
3
33
5,696
0.58%
Source: slottrade.aero (2014), table complied by APRC (2014)
83
Slot Secondary Trading and
Proposed Slot Auctions in the US (1)
(a) In 1960s, Reagan National and 3 New York City area airports
were congested so FAA implemented High Density Rule (HDR)
to limit the number of flights operated for all or part of the
day.
(b) FAA adopted a buy/sell rule on slots in 1986, as it believed
that a secondary market in slots would address concerns by
new entrant airlines and smaller carriers about access and
competition at High Density Rule-controlled airports.
(c) FAA proposed congestion management rules (including slot
auctions) for LaGuardia, Newark and John F. Kennedy Airport
in 2008 for easing the congestion.
Source: Colangelo (2012), US GAO (2012), Williams (2009)
84
Slot Secondary Trading and
Proposed Slot Auctions in the US (2)
(d)
Based on this proposal, most of the existing slots at all three airports would be
"grandfathered" to their current owners. This would allow incumbent carriers to retain the
vast majority of the slots they already operate.
(e)
Carriers would hold these slots (called "common slots") as lease agreements for 10 years.
At JFK and EWR, each carrier would retain 100% of its current slots up to 20, plus 90% of all
of its slots over 20 (meaning 10% of these would be taken out immediately for auctions).
Once the proposed rule expired, all interests of “common” slots would revert to FAA.
(f)
The FAA would then auction those slots withdrawn from eligible carriers (initially called
"limited slots") to successful bidders over a staggered 5-year period. Those slots awarded
through the withdrawal-and-auction process would have shorter leases.
(g)
Once the limited slots are auctioned and leased to the highest bidder, they then would
become "unrestricted" slots. The unrestricted slots, unlike common and limited slots,
would not be subject to withdrawal by the FAA, but would instead expire at the end of the
specified lease term. “Unrestricted” slots would expire when the rule sunsets (i.e. 10 years).
(h)
But this auction scheme has never been implemented.
Source: The mechanism was sumamrised by Williams (2009). 73 Federal Register29631-29632 (2008)
Remarks: The one at LaGuardia was quite similar to this one at JFK and Newark.
85
Current Cases of Slot Auction:
New York LaGuardia Airport (2011)
(a) A joint waiver request from Delta Air Lines and US Airways
was granted—to remove the prohibition on purchasing slots
at LaGuardia Airport (LGA).
(b) Auction of 32 slots at LGA and 16 slots at Washington
Reagan Airport (DCA), by a blind, cash-only sale through an
FAA-managed website.
(c) JetBlue Airways bid US$72 million for 8 roundtrips a day at
both LGA and DCA in the auction. WestJet, a Canadian
carrier, will pay $17.6 million for eight slot pairs at LaGuardia.
Source: 76 Federal Register 63703 in 2011, US DOT (2011), WSJ (2011)
86
Current Cases of Slot Auction:
Washington Reagan Airport (2014)
(a) US Department of Justice ordered to have auctions
for slots owned by America Airlines, as an approval
of merger of America Airlines and US Airways.
(b) According to the settlement for the merger with
DOJ, American and US Airways agreed to give up 52
slot pairs at Reagan airport.
(c) Results on 30 January 2014:
– 5 slot pairs remained unaccounted from the 52 DCA slot
pairs.
– Of those 52, Southwest now has 27 and JetBlue 20.
Source: USAToday (2014), Southwest Airlines (2014)
87
Slot Trading/Auction
Lessons for Hong Kong
Hong Kong is running out of slots soon.
In order to enhance the efficiency of slot utilization, HK
government should consider:
(a)
Allowing secondary slot trading.
(b)
Auctioning remaining slots in the next few years.
(c)
Encouraging existing airlines to surrender under-utilized
slots.
(UK ACL could impose financial sanctions, up to GBP 20,000 for each instance
of misuse of slots, on air carriers which misuse the slots. In Summer 2013,
British Airways was fined for GBP 2,000 as it operated off slots in Gatwick
Airport.)
88
Environmental Issues
Carbon Emission
Social Costs
Airport expansion
- Infrastructure cost
- Damages to ecology, like marine
Increasing flights due to expansion
- Noise
- Air pollution (SOx)
- Carbon
Example
• Social costs of London Heathrow Airport Expansion
Source: A New Approach to Evaluating Runway 3, New Economics Foundation, 2010
Carbon Emission:
Evaluation from HKAA
• HKAA evaluated the carbon emission in August 2014
• In the coming 50 years (from 2012 to 2061), the
amount of carbon emission brought by the operation
of third runway would be 266 million tonnes. The social
costs involved will be HKD 54.7 billion. (For the whole
journey of flights, including carbon emission in HK and
destinations)
• The amount of carbon emission brought by the
operation of third runway in the coming 50 years, will
only be 32 million tonnes and the social costs will be
HKD 7.3 billion only, excluding the emission in overseas
destinations.
Source: 明報財經網 (2014)
Results from Social Return on Investment by
HK Friends of Earth, HK Dolphin Conservation Society
and The Professional Commons
Source: 獨立媒體 (2014)
Divergence between private and social costs
Social optimum:
Marginal Social Cost (MSC)
= Marginal Social Benefit (MSB)
Result of negative externality:
MSC > MSB
=> Overproduction
Methods to handle the problem
Major economic principle:
Internalize all the negative externalities in
decision making
How to do it in practice?
• Quota
• Tax
• Other methods and regulations
Quota
• Fix the pollution quota at social optimum (Q2)
Example - Quota
European Emission Trading System (EU ETS)
• The European Union committed to reducing its GHG emissions by 8%
under the Kyoto Protocol.
• The EU ETS was set up to help the 27 Member States achieve their targets
by capping CO2 emissions from the main emissions producing industries.
Three phases
• 2005- 2007 launch period
• 2008-2012: Expansion to cover three new States (Liechtenstein, Norway
and Iceland); In 2012, expansion to cover the aviation sector.
• 2013- 2020: to reduce emissions by 20% by 2020 compared with 1990;
Expansion to cover more gases (nitrous oxide and PFCs) and new sectors
(petrochemicals, ammonia and aluminum, etc.)
Teaching and Learning Resources
Hubbard & O’Brien, 2014,
Economics, Pearson.
Policy Analysis and Opportunity Costs
Uwe Reinhardt, an economist at Princeton University,
wrote the following in a column in the New York Times:
Cost-effectiveness analysis seeks to establish which of
several alternative strategies capable of achieving a given
therapeutic goal is the least-cost strategy. It seems a
sensible form of inquiry in a nation that is dismayed over
the rising cost of health care …. Opponents of costeffectiveness analysis include individuals who sincerely
believe that health and life are “priceless”.
Policy Analysis and Opportunity Costs
Are health and life priceless? Are there
any decisions you make during your
everyday life that indicate whether you
consider health and life to be priceless?
Life is priceless??
Policy Analysis and Opportunity Costs
Lawrence Summers served as secretary of the treasury in the
Clinton administration from 1999 to 2001 and as director of
the National Economic Council in the Obama administration
from 2009 to 2010. He has been quoted as giving the
following moral defense of the economic approach: there is
nothing morally unattractive about saying: We need to analyze
which way spending money on health care will produce more
benefit and which less, and using our money as efficiently as
we can. I don’t think there is anything immoral about seeking
to achieve environmental benefits at the lowest possible costs.
Policy Analysis and Opportunity Costs
Would it be more ethical to reduce
pollution without worrying about the
cost or by taking the cost into
account? Briefly explain.
Third Runway of HKIA