ABSTRACT
The decision in the December 2003 White Paper, The Future of Air Transport, to support the expansion of London-Stansted airport was controversial, as was a similar expansion decision made in 1985. Much of the controversy has focused on planning and environmental issues, but both these decisions have had major implications for the economic regulation of airports; in this context, expansion of Stansted tested, and continues to test, the regulatory model. In particular, its expansion is relevant to the debate concerning investment incentives inherent in the RPI-X approach to economic regulation and whether the UK style of setting maximum prices (price caps) encourages the ‘sweating of assets’ at the expense of new investment. Stansted’s expansion also has a wider significance: it suggests a willingness of the government and the competition authorities to accept the leveraging of market power in pursuit of perceived public-interest goals; it provides an insight into the behaviour of economic agents when capital market disciplines are mute; and it illustrates some unintended consequences that can follow from market intervention.
