ABSTRACT
This chapter reviews the theoretical and empirical literature on airport costs. Airports have costs which differ from those of firms in markets that are competitive. In the short run, at an airport with ample capacity, the marginal cost is decreasing and is below average costs. However, if demand expands to a level at which capacity starts to become scarce, there will be delays and these will raise short-run marginal costs. In the long run, airports were thought to be characterised by natural monopoly. According to early studies, economies of scale—which cause marginal costs to be below average costs—start to run out at a level of about five million passengers per annum. But recent studies suggest that even at airports with 80 million passengers per annum, economies of scale and scope can still be realised. Hence, in many but not all local markets, airports are natural monopolies and are difficult to enter.
