The Economics of Aviation Security

Cletus C. Coughlin

The terrorist attacks of Sept. 11 caused more than 3,000 deaths, property damage in the billions of dollars and a substantial decline in the public's confidence in the safety of air travel. Immediately, aviation security rose to paramount importance in the nation's policy agenda. Not surprisingly, conflicting views concerning how to improve aviation security were voiced. Which economic insights are relevant for understanding this vital issue?

Making the Skies Friendly

Prior to the events of Sept. 11, aviation security was provided by three main partners: airlines, airports and the Federal Aviation Administration (FAA). Generally speaking, air carriers and airports provided security, while the FAA performed a regulatory role. Indeed, studies prior to Sept. 11 had highlighted numerous aviation-security problems involving aviation computer security; access to aircraft, airfields and other facilities; as well as the detection of dangerous objects. With the passage of the Aviation and Transportation Security Act in late 2001, the role of the federal government in providing aviation security increased substantially.

A key feature of the airline industry is its transportation design. With its network structure, passengers from various remote nodes or spokes (different airports) often converge on a hub (a single airport), then depart for their final destinations. This hub-and-spoke system leads to interdependencies that give rise to what economists call an externality. An externality, also termed a spillover, exists when either the consumption or production activity of one consumer or firm affects directly either the well-being of other consumers or the production activities of other firms.

The events of Sept. 11 demonstrated vividly that aviation security—or lack thereof—in one location affected the movement of passengers and freight throughout the system. The existence of an externality provides an economic reason for governmental involvement in aviation security. Unregulated private markets are unlikely to provide sufficient aviation security because those making security decisions for one location may not account for the spillover benefits conferred upon others throughout the network. The role of government, however, might take various forms—regulating private providers, subsidizing private providers, or providing aviation security publicly. No one form of governmental involvement is necessarily superior to the other forms. Regardless of the form, too little or too much aviation security is possible.

A Boost in Resources

One result of the new legislation is a substantial increase in resources for aviation security. For example, the Congressional Budget Office estimates increased federal expenditures of roughly $3.5 billion during both 2003 and 2004. These expenditures will fund large increases in the use of labor resources (passenger and baggage screeners, law enforcement officers in airports and airplanes, and administrators) and capital resources (passenger and baggage screening machines, access-control systems and reinforced cockpit doors). Because it is difficult to measure the effect of aviation security, the enhanced security produced by these additional resources is unclear. Thus, it is easy to foresee controversy about the benefits stemming from this increased commitment of resources. Nonetheless, during the legislative debates, any controversy about increasing resources was overshadowed by controversy surrounding the roles of airlines, airports and the federal government.

More Controversy

The federal government has assumed responsibility for the actual provision of aviation security. Especially contentious is the fact that federal employees will now be responsible for passenger and baggage screening. Proponents of this change argue that, as opposed to private provision, public provision reduces the incentives to increase profits by "cutting corners" on quality via cost reductions. On the other hand, a public agency might not provide security services efficiently because it can operate in a more-or-less monopolistic way. Furthermore, a public agency might provide excessive security and incur unnecessary expenses because it is likely to be judged on its security record and not on all the attributes encompassed by air transportation services for consumers. Unfortunately, economic theory alone does not provide a clear answer concerning the appropriate role of government. The bottom line is that policy-makers confronted tough decisions in terms of the amount of resources for, and the role of governmental involvement in, aviation security. Their choices will likely be scrutinized as the federal government assumes control of aviation security and as the war on terrorism continues.

Additional discussion on this topic can be found in "Aviation Security and Terrorism: A Review of the Economic Issues," which Coughlin co-authored with Jeffrey Cohen and Sarosh Khan, and is scheduled for the September/October 2002 issue of the Bank's Review.

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