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Abstract ▼ AI-Helper

This study has two purposes. One is to provide a theoretical review of inefficient resource allocation resulting from market failure in the air transport industry, with a focus on the market for air transport between Jeju Island and the major cities in Korea. The second purpose is to analyze what ty...

This study has two purposes. One is to provide a theoretical review of inefficient resource allocation resulting from market failure in the air transport industry, with a focus on the market for air transport between Jeju Island and the major cities in Korea. The second purpose is to analyze what types of policy tools are efficient in order to correct market failure in this instance. The types of market failure that this study found in air transport industry are imperfect competition and externalities. The price elasticity of demand between Jeju and Seoul turned out to be 0.81, indicating that a 1 percent rise in air fare leads to a 0.81 percent increase in passengers. However, having a price elasticity of demand with a positive sign is unusual. This arises because the residents of Jeju or visitors to Jeju do not have comparable substitute transportation for traveling between Jeju Island and Seoul, and thus have to take the prices set by the two airlines, Korean Air and Asiana Airlines. In addition to imperfect competition, such price increases have a negative impact on the Jeju tourist industry, which accoutns for more than one-third of regional gross domestic product. Any increase in airfares by the two firms generate a negative externality, since a I percent rise in airfare causes a 0.47 percent decrease in tourists. In order to correct for these market failures, the study suggests that the central government deregulate the air transport industry to allow new firms to enter the market, as opposed to having the Jeju provincial government directly take part in the industry.

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