On the Efficiency of Competitive Markets for Operating Licenses

Some economists and policy makers have suggested that market allocation of scarce operating licenses, broadcasting licenses, and airport "slots," for instance, would lead to their efficient use. This paper demonstrates that a competitive market allocation of operating licenses, whether attained through auctioning, selling, or allowing resale of the rights, does not, in general, assure efficiency. The profit criterion that would guide the allocation of licenses in a competitive market would not necessarily lead to the uses that maximize social benefits. The paper shows that the difference between private and social incentives in the allocation process can be quite large. The theory is then applied to discussions of allocating airport takeoff and landing slots and broadcasting licenses.