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Econ Oligopoly, Government Regulations, Externalities, Profits

In: Business and Management

Submitted By maltoftheearth
Words 446
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AMR Faces $162 Million in Penalties: WSJ Tues. Aug. 7 2012 Pg. B3 Key Terms: Oligopoly, Government Regulations, Externalities, Profits
One could argue that one of the worst feelings in the world is that sinking sensation when you find out that your flight is delayed. Often times, you will see your plane sitting at the gate, so what are they doing out there? Odds are the answer to this question is maintenance. Maintaining a fleet of planes is a huge cost to the airline industry and it’s a cost that the airlines are willing to skip out on if they can in order to maximize profits. The airline industry is an oligopoly. This is to say, there are limited number of firms in a market supplying the same good. In this model, firms are really sensitive to what each other are doing. Each one is trying to get a leg up on the other and if saving a bit of money on maintenance means your firm can keep up with the next airline that lowers its prices, they will do just that. Enter the FAA. The Federal Aviation Administration is a governmental organization designed to monitor and regulate the airline industry, all for the benefits of the taxpayer of course. The FAA wants to hit AMR Corp., the parent company of American airlines, with $162 million dollars in fines for violations concerning maintenance. These fines seem hefty and would lead one to believe that AMR Corp. is putting an unsafe product in the air. The scope of their crimes may not be as bad as it seems. In this case the externality that is consumed by the user would be safety, and in reality the ratio of accidents to trips in the air is better than what you get in a car. So, where flying could possibly be dangerous, when measuring the externality of safety we would say that on a whole the externality of airline safety is a positive one. Beyond that, the airline industry produces countless other positive externalities, such as linking the world economy and transporting people across the globe. There is no doubt that the airline industry is vital to both the US and the world economy. Today we live in a world where the airlines are cutting cost in every imaginable way to make a profit. As a matter of fact, the aforementioned AMR Corp filed for bankruptcy just last Nov. So, where nobody wants unsafe airlines, perhaps the government could spend some resources of helping the airlines make a buck, rather than saddle them with more costly regulations, thereby enlarging a positive externality that they seem bent on lowering.

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