The E - Procedure: An Application to the Development of Aviation

Summary: "Esperanto, per speciala instrumento". In English, "one who hopes, with a special instrument". The E - procedure, embodying the principle of demand, or direct revelation, will drive public and private joint decisions towards efficient social outcomes, averting the social efficiency distorting features of distributional competition and rent-seeking under existing resource allocational (fiscal and regulatory ) or other social control arrangements. The E -procedure, adapted as a proposed means of making common-user decisions within the United States Federal establishment (___, 1983) is further developed here as a means of ensuring more efficient intergovernmental and private regulatory and tax/financing policies and decisions affecting resource development in the United States economy. The method, however, is generalizable to a variety of development-oriented regulatory and privatization settings such as State-owned enterprise elsewhere in the developed and developing world. This paper provides an introductory treatment of the method suggested by the ________________________, illustrating how it could achieve "dynamic" social efficiency within the framework of firms "or networks" serving the economy of any given institutional regime, including the legal and policy frameworks which now govern the provision of air transportation services in the U. S. economy. The incentives are structured to drive the network toward dynamic efficiency in terms of social gain less the cost of making decisions and administering the institutions that will best achieve the maximum social gain. A critical decision cost called here an "E-cost" (embedded in the "pivotal mechanism" of the incentive compatible literature, will drive institutions towards efficiency while minimizing other decision, information, transactions, and administrative costs including compensations required to achieve "dynamic" efficiency. Two additional papers treat (1.) the policy problems which have grown out of current methods of social control (tax, financing and regulatory) affecting aviation development and (2.) more completely justify use of the E - procedure in particular intergovernmental decision and development settings affecting aviation and development. The papers utilize a "transactions costs" contractual framework for evaluating alternative institutional arrangements, in order to best demonstrate the comparative utility of the E - procedure as a method of making decisions affecting the development of aviation.

1. Introduction.

An incentives procedure initially designed to achieve efficient resource allocational decisions within the Federal government of the United States itself, and for interactions between the government and other institutions or associations, is applied here to United States intergovernmental and private decisions affecting aviation development while illustrating, the broader applicability to other financing and resource development/ allocational activities involving government and the private sector. The incentives incorporated into the E - procedure, in a comparative institutions framework, achieves "efficient regulation" in a broadly defined decisional framework and with reference to tools of social control and decisionmaking involving interventions by the State through taxes, subsidies or other regulatory forms. The E - procedure will achieve socially desired investment and pricing decisions within an incentive-compatible regulatory framework which leads both governmental and private parties to achieve resource development outcomes with the highest net social benefit (taking into account the cost of decisions, including the E-cost of a "pivotal mechanism"). *

_________________________________________________________________* (Green and Laffont (1979) and Kreps (1989) provide a thorough, though mathematical treatment, of the relation of the "pivotal mechanism" in relation to other incentive compatible mechanisms and "optimal contracts" based on the direct revelation principle. Clarke (1971, 1972), Tideman and Tullock (1976), Tideman (ed., 1977), Clarke (1980), Mueller (1989) and Varian (1989) provide explanations and illustrations of the efficiency properties of the demand revealing procedure, the operational content of which in a reasonably complete decisional framework, first advanced by Buchanan and Tullock (1962), we propose to call the E-procedure.

Rather than an incentive, penalty, or Clarke tax, we utilize the international language (Esperanto or "one who hopes" and par specila instrumento or "with a special instrument" to better connote the potential 'dynamism" inherent in the E - procedure. In the language of modern game theory, the E - procedure, properly implemented, drives institutional actors towards "positive sum" agendas rather than zero or negative sum agendas, given the ability of "controllers" (with social accounting control abilities) to adjust the distribution of certain joint costs in a Wicksellian framework of just taxation (Mueller, 1989) The controller's adjustments, given he(r) performance or E-function (social or E gains - E costs and other decision and administrative costs), will lead (s)he to achieve maximum development potential while checking non-positive sum agendas which might create E or other administrative costs greater than the realizable social gains. In our application to aviation development, we also utilize a system of E - point voting (see Tullock, 1990) based on some initial and perhaps quite imperfectly assessed site value such as an airport, which are translated into E-points and which become gradually "securitized" into E notes, depending on the relative preferences of the institutional actors for E points or E - Notes. The E - method is particularly useful when certain critical assumptions (i. e. the median voter assumption) concerning the efficient operation of political markets may be violated. The emergence of any E cost presents the actors with an immediate and transparent diagnosis of either a problem (e. g. a zero sum game redistribution at work or blockage of a positive sum game), unless certain parties have been able, despite the incentives of the controllers, to suppress the E-cost through coalitions or have been able to engage in other types politically opportunistic behavior. In this regard, the social transparency of the method is its greatest advantage as well as, in a narrow sense, a possible disadvantage.

In addition to Esperanto, we appeal to another "vocabulary of politics" (Weldon, 1958) organized around "puzzle-solving", "problemsolving" and "surmounting difficulties" (Clarke. 1980). Given the rapid developments in microeconomics in the last two decades (in an area called the economics of information -- see Kreps, 1989 for a recent drawing together of this vast work in a textbook), we believe that the mechanisms can now work effectively in practice and outside laboratory settings where the comparative efficacy of the incentive mechanisms has been demonstrated. While we continue to maintain that the demand-revealing method, properly understood and implemented, is perhaps the best "social-analytic" as well as more operational and efficient when compared to other mechanisms, we actively encourage further experimentation and operational testing. Our treatment of aviation development in these several papers drives towards this end, and we actively encourage all of the "developers" of the mechanisms, who now include great numbers of people, to actively participate in this process of experimentation and operational testing. (End Footnotes)

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Our method or E - procedure is applied here to the problems/opportunities inherent in the development of U. S. aviation institutions, providing a generalizable means of achieving economic, environmental and social regulatory goals, consistent with the gradual "privatization" of governmental aviation resource developmental activities. The E - procedure provides for more effective governance and regulation of entities that enjoy natural (or governmentally created monopoly) advantages in commercial and resource development and the provision of essential public services.

The E - procedure is a method of political economy, developed over the course of 25 years, which addresses to try to solve the problem of "environmental management" through a demand revealing natural monopoly approach (Clarke, 1980) which we now call the E - procedure. Until now, the procedure has not been fully developed operationally because, in the mid-1970s, interest in the demand revealing method centered largely on its "preference revelation" properties. Government regulatory policies and political attitudes made any rational approach to environmental management quite difficult. Our interest in developing the method in the context of aviation development arose out of the growing difficuties that emerged out of the successful deregulation of the U. S. airlines industry in the late 1970s and 1980s. The problems, so-called "supply-side or "congestion" problems are summarized in Hahn (1989) as well as Morrison and Whinston (1989), who characterize deregulation as providing "incomplete solutions" to the problem of the relationship of government to the aviation industry.

The appoach taken here illustrates the potential of the method as a means by which the Federal Government could begin to more adequately fullfill its regulatory oversight responsibilities to other levels of government and individual consumers through the provision of adequate infromation. To do this the Federal Government would begin to more effectively operationalize the "maximization of net social benefit" criterion which are the guiding social welfare criterion of several Executive Orders. To fulfill this responsibility, it would provide information to non-Federal governments that would motivate these governments to design the appropriate institutions that can best achieve the the "highest net social benefit". In turn, these governments can also achieve more effective regulation, including the provision of more effective competition, which may require the implementation of new, more effective decision rules. For an more extensive treatment of these ideas, see Tozzi and Clarke, 1983)

Presidential Executive Orders: Federal Regulation. The E - procedure represents a particular decision rule and set of incentives and procedures that emerges as a result of a decade of effort to implement the several Presidential Executive Orders to improve federal regulation, regulatory coordination and Federalism. These Orders cover such matters as Federal Regulation), Regulatory Planning), and Federalism. In particular, the E - procedure will assist in the implementation of a social welfare norm, incorporated into these several Presidential Executive Orders, for achieving the "highest net social benefit", subject to other legal, policy, or constitutional constraints. In our view, and as supported by many observations in the academic literature, the E or demand revealing method can make such an efficiency norm more fully operational, because it reconciles the real values of participants in a public interaction without relying simply on the methods of conventional cost-benefit analysis to, perhaps exogenously, determine social preferences. The method also avoids, the distorting effects of processes driven largely by distributional considerations or other goals, the achievement of which can often be used to override the Exectuive Order principles. In such case, the costs of achieving these other goals (i. e. national security, competitive equity and other social goals) will be made more explicit and subject to explicit trade-offs by the affected decisionmakers.

Coordination: The method also achieves more effective coordination, not only within the Federal govenment, but among levels of government interested in resource development which will effectively advance broad economic goals, consistent with an array of environmental and social goals and considerations. The method acheives the general goals of a "regulatory budget" (Budget of the United States Government, FY 1991) in the context of site or enterprise-specific activities, where the profit-seeking goals of the specific development or enterprise activity must be reconciled with intergovernmental environmental, social or other goals. Although we confine illustration of the use of the method to aviation development in the context of airports and "common user" or network facilities and services, it is broadly applicable to other (e. g. land or natural) resource development activities and enterprise or sectoral development goals.

Privatization: For purposes of aviation development, the E - procedure will reduce the drain on the general United States taxpayer while making air transportation service and the development/operation of airports and the air transportation network more responsive to the needs of the public and the aviation community. The method can also address a number of legal and policy problems that have made it difficult for States as well as localties, large and small, interested in privatization to acheive their objectives, consistent with National policies affecting air transportation.

(Footnote the legal and policy difficulties, for example, encountered by the County of Albany, New York in selling or leasing its airport to a private consortium as well as a range of difficulties affecting privatization proposals for larger hub airports in the initial stages of development -- Philadelphia and Los Angeles, for example).

The authors are economists in the United States Government who work in the area of government regulatory oversight and who share a common interest in "problems of privatization" affecting the finance and regulation of resource development activities . We believe believe that with more attention to contractual design and the "how-to-do-it" of the privatization process (see Cowan, 1990), the E-procedure can ensure that considerable potential benefits of privatized local airports can be realized consistent with all United States national and local, including transportation and aviation, goals.

We initiated our more active exploration and exposition of the E-procedure in the late summer of 1990, in part, because much more limited market incentive approaches (i. e. an existing "aftermarket" in landing rights at four major United States airports that was put in place in December, 1985) was being criticized as insufficient to address the growing problems of new entrants, particularly in the face of growing conjestion and lack of provision of sufficient capacity in the several affected metropolitan areas served by the four airports. Our initial exploration into the properties of alternative solutions to the problem of allocating landing rights emerged into this somewhat broader effort, including interest in ways of encouraging privatization while dealing with certain externatity problems affecting the operation of the air traffic control network, environmental problems such as aircraft noise, and an economic regulatory problem that has led the Federal Government to suppress market prices which might better allocate existing airport and airspace capacity.

In this context, it is important to distinguish the approach we describe as rather different from what the United States public has come to know as "privatization" in some other national and local contexts in this and earlier decades. It resembles neither (a.) the national "mixed" enterprises in the national transportation and communications sectors (under the aegis of mixed government/private corporations like Conrail, Amtrak and Comsat, of which the United States Federal Government has been partner or (b) the type of local "franchise" monopoly that has characterized the establishment of local cable television systems. _/

Our approach to privatization would, to the greatest extent possible, devolve economic decisions on privatization to State and local governments while the Federal Government would institute an set of incentive-compatible decision procedures for making more effective resource allocational and regulatory decisions affecting the provision of "network" goods and services (i. e. air traffic control system) and assisting State and local officials in coming up with effective noise mitigation strategies. The involvement of the government in the approach we propose is guided by incentive-compatible decision rules (e. g. the E-procedure) to ensure that regulations and other forms of social control will harmonize the achievement of maximum private and social returns in a manner so as to achieive maximum net social benefit to United States citizens. In large part, we take a localized approach to many aspects of aviation development and governance that permits and encourages a significant degree of privatization while ensuring, in economic terms that an important range range of positive and negative "externalities" associated with aviation development are addressed. recommend, which is developed in much more detail in papers to follow, has The approach we recommend important features of many of the recommendations made by the 1988 Report of the President's Commission on Privatization, including features (such as passenger facility charges or PFCs) which have recently been enacted as part of the "Aviation Safety and Capacity Act of 1990." Most importantly, it provides a means of effectively protecting aviation development from relatively "costless" political interferences, while ensuring that the real costs and benefits (or values) of constituencies affected by aviation development are effectively weighed in social decisionmaking.

In short, the decision procedures we propose can better promote necessary tradeoffs among goals of the aviation transportation system, while ensuring the tradeoffs will achieve the highest net social benefit. The goals include the promotion of national and local economic development and of a more competitive transportation system; the safety and security of passengers: and the reduction of congestion, delay and local environmental problems (especially adverse land use and noise effects). The methods we propose can also play a critical role in helping to surmount a range of difficulties on the supply-side, particularly at conjested airports, difficulties that have prevented the full realization of the considerable benefits of air carrier deregulation during the last 12 years. (Hahn and Krosner, 1989, Morrison and Whinston, 1989).

We seek to design, however, a fiscal and regulatory approach which is efficient, distributionally stable and individually rational (e. g. reasonably defined and affected groups of participants in the system and the general public will benefit). Further, the public can determine how disadvantaged parties, which may be capturing rents from existing economic regulation of airports should be compensated or otherwise treated in a transition to a deregulatory, privatized environment.

2. Background

This paper is the first (Part I) of three staff working papers on aviation regulation, finance and privatization. In the research for and preparation of these papers, entitled "Advancing the National Debate on "Aviation Deregulation and Privatization", we became increasingly convinced of the utility of demand revealing incentives as a means of driving governmental and private decisionmakers towards socially desired outcomes, and of maintaining an efficient, stable and individually rational process of evolution towards privatization in airport development. We believe the full advantages of our contractual, incentives approach can be best appreciated in the context of the problems of intergovernmental taxation, finance and regulation that have evolved over the last sixty years and which lead us to suggest methods of relying on private contract, complemented by the availability of the incentive compatible decision procedures to drive negotiations over airport tax, financing, regulatory and development decisions towards, rather than away from, socially desired goals. We have left the historical treatment of the complex web of entanglements (tax, fiscal and regulatory) as well as a comparative assessment of airport development privatization approaches in other countries) is presented in our second paper in the series where we also describe in some detail how our method can help untie the existing Gordian knot of current fiscal and regulatory entanglements.

In that second paper paper, the reader will also more greatly appreciate the significant diversity in the existing airport system, and begin to wonder why they are all so entangled in the complex web of social control. Airports that were once private (as in Burbank, California) became public ones, even long after World War II national security considerations and pre-War philosophies and Congressional findings that "no sources of private finance" would ever be available for the National airport system. The reader may also find lacking any pursuasive economic rationale for the degree of "publicness" in the ownership and control of the system, based on "market failures" such as public goods, natural monopoly features and externalities. Even the "natural monopoly" of the airways, an argument sometimes used in findings of a recent Presidential Commission seems

unpersuasive in light of difficulties, or "government failures" in the provision of multibillion dollar air traffic control facilities, and the growing delays at our largest and most congested airports.

Against this background of the problem and how it evolved (in Part II), we describe here the general properties of a procedurally out here a method for coping with public goods, natural monopoly and externality problems to the extent they exist, a method that can also be used to gradually untangle the existing system from what we believe to be an inappropriate system of social and regulatory control. These problems may be exacerbated by legislative and administrative pressures to add additional layers of traditional regulatory control in a more, rather than less administered system. We seek, alternatively, to illustrate the full developmental potential of what can be achieved through proper use of incentive-compatible methods, particularly our E-procedure. the application of the new decision procedures in some carefully chosen airport development and privatization settings. These settings may exhibit enormous diversity, ranging between totally Federally owned airports within or near the Nation's capitol, to some 500 or more airports, that have been financed intergovermentally but are largely tax exempt and controlled by local general government or public authorities throughout the Nation.

We, therefore, have started not with a problem statement and set of solutions that recognize the great diversity in airports (the subject of the second paper) but rather with the introduction of the demand revealing or E-procedure and its use as a means of driving institutions, public and private, towards social goals. The procedure, for example, can help resolve a reconcile important national air transportation dilemmas presented in authorizing legislation that has recently been enacted (the Aviation Security and Capacity Act of 1990). The method will address difficult social choice dilemmas inherent in aviation financing (e. g. the supply of air traffic control in a deregulated, privatized environment) as well as a number of regulatory problems concerning, for example, noise control, allocation of slots at major airports, and authorization for passenger facility charges as well as the funding of aviation research and development activities. In this paper, we suggest a focus for dealing with these problems in terms of research and design of alternative institutional arrangements in an environment where technology is now beginning to clearly outrun institutions. We hope to stimulate an Executive Branch debate on the potential value of such an emphasis on institutional design and to eventually inform the Congressional and public debate with a specific illustrations of a contractual, incentive-compatible approach to intergovernmental regulation and fiscal coordination.

Previous Efforts to Develop the Procedure for Government Implementation: The procedure we describe here is designed to complement our broad contractual, incentive-compatible approach to be described more fully in a following paper. The procedure described here builds upon what we believe to be the first governmental proposal for applying the new incentive-compatible mechanisms to actual (governmental) decision-making. The U. S. Office of Management and Budget described the method several years ago as a potential means of making more effective decisions in the area of government information technology management, for example -- in the acquisition of a new government-wide telecommunications system or perhaps intra-agency computer systems. Better decisions, in such cases, might be achieved, in OMB's view, via judicious application of these new incentive compatible, or demand revealing, mechanisms which are aimed generally at achieving more effective social choices._/

The particular incentive-compatible approach or decision rule illustrated here, called demand revelation, has been called "a new and superior process for making social choices (Tideman and Tullock, 1976 -- see also Varian (1989) or Mueller (1989) -- for a comparison with other political processes. Demand revelation utilizes a "pivot mechanism" (Green and Laffont, 1979) or "Clarke tax" (Tideman and Tullock, 1976), after Clarke(1971), which would have each party in a demand revealing interaction (or vote, if you will) pay the opportunity cost to others (which they will reveal truthfully) if his or her vote changes the outcome that would have been chosen by others in the absence of his or her vote.

The demand revealing procedure, solves or "mostly solves", the classic public goods or "free rider" problem (Samuelson, 1955) of public economy where, for example, voters asked to express their willingness to pay for a public good, would hide or understate their preferences, if the amount they will be taxed is, as classic benefit taxation principles warrant, is proportional to the benefits or willingness to pay they reveal.

The method we propose motivates decision-making in accordance with the benefits received principle of taxation in that the participants seeking to avoid the generation of any Clarke or penalty taxes, or what we now call here E-costs, will unanimously choose the most efficient result if their shares of costs for any departure from the status quo are in proportion to benefits received. Clarke(1971) and other (Tideman and Tullock, 1976) have suggested the use of an independent arbiter (judge or econometrician) for this purpose. In this paper , the arbiter is an independent financial controller (perhaps a mangement accounting firm, replete with appropriate legal and economic expertise), whose decisions are reviewable, and who is enabled to determine how the "costs" of departures from the status quo of government regulations as well as investment projects affecting airport development (both existing and new airports) will be allocated. The criteria for distributional adjustments in both cases are the benfits received criteria underlying project finance that OMB and the Federal agencies have developed over several decades and which have been embodied also in "regulatory analysis" criteria of Executive Order 12291. (The difficulties in applying such cost-benefit criteria, in case where underlying values or preferences, or even costs (particularly the relevant opportunity costs) are unknown, are confronted directly by the demand revealing method in that participants will accurately as possible reveal their true preferences. However, controlling the distribution, in as accurately as possible estimating the relative benefits to each party, is important in order to preserve individual rationality (i. e. each participant will benefit ) and to avoid coalitions that could determine sub-optimal outcomes.

Efforts to implement efficiency criteria, and to actually enforce satisfaction of these criteria through demand revealing procedures, can of course meet with concern and resistance from those who perceive potential unfairness or uncertainty flowing from the potential disturbance of an existing distributional status quo. Government agencies potentially affected by such a decisional approach agreed that while it might have many theoretical, as well as practical, merits, there were many problems. For example, who was to decide on such important questions as the initial allocation of costs which, if imperfect, could defeat the desirability of the mechanism through coalitions or perceived wasteful internal governmental budgetary allocations (at least from the viewpoint of the participants). Agencies were concerned about a range of other matters such as the perceived dominance of large agencies relative to small ones or the difficultly that any agency would have in precisely quantifying the benefit (to it) of potentially complex technologies. _/

Although the role of the independent arbiter was left somewhat vague in the original proposal, we take some pains in this work to elaborate on the kinds of distributional concerns that were raised in government agency consideration of the proposal as well as the role of a person or person who is given significant power to make prior allocations of costs (contingent on the chosen outcome), in that case among agency recipients of the benefits of the shared technology. Although the basic criterion guiding these allocations is the long-revered benefits received principle of public finance, its application can be somewhat controversial even in the context of such a relatively simple problem as intra-governmental cost allocations. The distributional consequences become even more important in the context of the governance of a local airport authority which is discussed in the following section and at Annex A.

--In this context also, we potentially also confront some very difficult regulatory cost accounting problems involving the Federal government vis a vis other levels of government and the private sector. A good current example is the issue of who is going to pay for critical enhancements involving air safety or security, where there are, say, important perceived national benefits as well as possible commercial benefits to the airport operator as well as airlines and passengers. (In this respect, airport regulation takes on several properties that were of concern in the process of the 1983 divestiture of AT&T which stimulated the preliminary formulation of a regulatory cost-sharing arrangement to reconcile certain national security/emergency preparedness (NS/EP) objectives with the commercial objectives of private carriers who in a competitive environment might have been less willing to have provided certain interconnection features were being been provided by AT&T. A cost-sharing approach outlined in Annex A could readily be applied in the provision of critical national inputs of importance to national security or other interconnection features that serve the national interest in an efficient national transportation network. OMB, in 1983, observed the potential utility of such a decisional approach, for example, in the configuration and procurement of a multi-billion dfollar air traffic control system.

--Another critical regulatory problem is localized environmental controls which may not always take account of the "national cost of commerce" when imposed as the result of a weighing of local benefits of environmental improvement in relation to the local costs of, say, noise mitigation (even in a competitive airport environment where excessive restrictions would reduce the local development benefits of air travel to the community, a problem that we elaborate on at some length in the following section and in Annex A.

Designing a desirable institutional arrangement where such factors, particularly localized environmental benefits the national costs to commerce, as well as national interest in safety and security of passengers, are at play, is no easy task. However, we will try to demonstrate that these difficulties are solvable at a practical level in the context of addressing what many consider to be an even more difficult goal -- ensuring the delivery of quality air travel and airport services at the lowest possible price in a way that will maximally benefit the residents of a local area, including developers who may benefit from, say, a more heavily utilized airport or nearby residents who may be adversely affected by more noise.

Our papers give particular attention to the concern that a privatized airport environment is somehow incompatible with the integity of the national aviation system, either with a network of air traffic control that may have certain natural monopoly characteristics or local airports that may exhibit certain natural monopoly advantages. In our second paper, we deal specifically with various manifestations of the natural monopoly argument, including the pervasiveness of "government-created monopoly" that currently characterizes the national airport system. In this paper we highlight certain national public goods objectives, which like the national highway system make it difficult to achieve completely localized, private solutions to the provision of certain public good elements. The existence of these elements, however, is quite different from the commonly perceived natural monopoly of a local public utility facing decreasing costs in the provision of service. Even if we did face such problems, demand revealing decision rules can be designed to cope with the problem because the phenomena of decreasing costs are simply a special case of the more general public goods problem. (Samuelson, 1955, Clarke, 1971, 1980 Tozzi and Clarke, 1983)

* The E-Procedure (Demand Revealing) as A Technique of Privatization (section here addresses incentive aspects of the system that minimize institutional risks and improve institutional/social rewards relative to costs/risks. Relates to distributional stability criterion and suggestions for satisfying the criterion advanced by Tideman.

3. The General Operation of the Procedure in a Decisions/Transactions Cost Framework.

We outline the essential elements (principles) of the E - procedure in a decisions/transactions cost framework and elaborate on its details in an aviation development setting.

Principle 1. The E - procedure will maximize an organization's contribution to social output (Eg less the costs of making decisions Ec.

. Critical to this process and a part of the cost of making decisions is the "pivotal mechanism" (Green and Laffont, 1979) or "Clarke tax" (Tideman and Tullock, 1976) after Clarke 1971. Therefore Ec is defined as including Ec' which is any revealed "opportunity costs to others of changing a decision that would otherwise be made in the absence of one's participation." (Tideman and Tullock, op. cit.)

. Total decision costs include Ec' and Ec'' , or all other costs of decision, including transactions, decision, administrative, transactions and policing costs (Buchanan and Tullock, 1962 and Clarke, 1971)

Principle 2. Social and Individual Incentive to Maximize Eg - Ec.

One seeks to maximize the highest net social benefit. (Eg - Ec). In the United States we now seek to operationalize this principle by Presidential Order (Executive Order 12291 - Federal Regulation) and related orders which would ideally operationalize these principles through successive layers of government and in the coordination of regulatory and social control processes.

. Effective enforcement of policy intent, however, requires incentives. One uses incentives that gives subnational governments, firms, voluntary associations and incentive to maximize Eg - Ec. As first suggested by Tideman and Tullock, the incentive should be in the form of a transfer measured by some function ( ) or percentage of the measurable net social benefit. Participant should then have the incentive to maximize Eg - Ec.

. The procedure is individually rational (all participants benefit) the extent to which, starting from some initial distributional status quo, the costs associated with the departure or change are distributed according to benefits received. (Wicksell, 1896)

. To achieve this result, the participants should jointly agree upon a neutral party charged with achieving this result, to the extent that the cost of doing so relative to alternative procedures so warrant. The process may require a continual process of adjustment in any realistic "dynamic" context, in which case information on previous rounds should not bias estimates of benefits received.

The arbiter, or controller of the E- Process. may also allocate decision costs so as to reasonably ensure net gain maximization and specifically control for agenda items which may tend to redistribute gains or costs from one part of the organization to another. If one, for example, asks for one unit of E from another, the benefit of such redistribution would be adjusted by 1e, so that there will be no gain and actually a net cost if decision costs were allocated to the proponent of the redistribution.

The participants and the controller may find optimum ways to economize on Ec, relagating many issues to non-major significance and resolving them through management decision or informal procedures. In large measure, the gains and losses over many issues may balance out in a probabilistic sense. (Tideman)

If there is probability that Ec' may be significant, a market may be organized to estimate the magnitude of these decision costs, and the participants would be given the expected amount ex ante.

Principle 3. When uncertainty (including uncertainty about distribution of entitlements to the status quo) is significant, and the procedure is utilized to achieve potentially large, but uncertain potential gain, the participants may find useful an initial distribution of points that are based on some initial estimate of value. A system of E - point voting (see Tullock 1990) may assist in the move towards a more stable and competitive political and market equilibrium. Additions to the stock of initial E - voting points are distributed in accordance with competitive market principles and benefits received criteria.

In more almost 25 years of considering the implementation of this

procedure in contexts where normal political and market equilibria may be lacking, we believe this principles can guide a wide range of organizations in acheiving mutually desired ends. We elaborate briefly here on our application to aviation development with further illustration provided in Annex A and in a following paper.

Application of the Principles to Aviation Development:

With repect to maximizing Eg - Ec, we expand an approach advance by Dolan (1978) -- see also OMB (1983). Dolan structured a system for "priority queneing problems" generally and airport "congestion pricing" specifically where a "system administrator" would minimize waiting times and priority prices (our E' costs or demand revealing incentive taxes) so as to maximize social gain for use of the facility if there was a queneing problem. We develop an extension of Dolan that would have the system (perhaps the entire transportation and development network) subject to a "performance indicator" ( in principle 2 above) that will provide incentive to maximize net gains.

Our approach to point voting as recommended by Tullock ( 1977,1990) -- see also Mueller, ch. 5 on point voting in relation to demand revealing. Our E- point voting system is initated in respect to any initial estimate of airport value (see Poole, 1990 and Table folowing which shows an estimated value of 50 airports in relation to values established in terms of 1987 enplanements (about $60 per 1987 enplanements. In the system, the local airport owner might enter into a contract with the several levels of government and contractors that would motivate all the actors to provide public and private goods and services and to manage these resources in a socially optimum way. For example, we might have a hypothetical average airport valued (as an airport), according to Poole, at 8.66 million enplanements x $60 or $500 million. The initial value might be divided into 500 voting points and ditributed in some initially feasible way that would resolve issues of who owns what in relation to existing phsical and economic resources. From the point of initial distribution, the impact of further resource allocation decisions would be evaluated from a benefits received standpoint and incentives would be structured so as to maximize net social gains.

In the following (and further at Annex A) , we briefly illustrate the method by way of graphical and discrete case illustrations:

* Note that a more advanced version is introduced here to focus primarily on the importance of the performance indicator(s) as a measure of social gain and the minimization of all the relevant costs (including E-costs. In Annex A, the illustrations are adapted to a set of laboratory experimental results by Ferejohn, Forsythe, and Noll (1978) which were commented on by Clarke in terms of the demand revealing approach. An aviation budget game, using the FFN numbers is constructed in Annex A to show the importance of the E-procedure in motivating positive sum agendas and the role of the performance indicators driving the participants and the controller or arbiter to avoid zero sum agendas.

** Footnote that in the case of discrete case examples, one such example was prepared by one of the authors when originally asked to provide a such an example for Mushkin (1972) The author (Clarke) was working on a classic airport public finance dilemma in a large midwestern state. Having worked for several years on the economic and financial feasibility of siting a new airport in Lake Michigan, the analyst found himself in the State Capitol, then working on the feasibility of an alternative siting of a land airport. In developing the discrete case example, the analyst began to wonder if the question whether an airport at all was needed had been ever asked. The answer was no and "an airport is probably not needed until 1995, soon replied the engineering consultant replete with a "quick and dirty" demand study, "but the State loses Trust Fund dollars". Not the best example with which to describe the method, because (in the absence of the services of our controller) the socially desirable decision on no airport also resulted in a penalty cost which "flowed outside the (State/local finance) system". This anecdote, however, illustrates what we believe is the potential power of the decision rule in motivating parties, confronted by its imagined implications, to avoid its incidence through traditional contractual processes and negotiations. (Parties usually make peace, if they face the unfavorable consequences of the use of weapons, and the imposition of the penalty tax does not serve the collective interests of the participating parties, nor the controller, who has a financial incentive to also avoid its imposition. However, the penalty tax will be used by each person individually to acheive his or her desired outcome as well as defeat outcomes that put such a person at a distributional disadvantage. The tax also drives the system towards social optimality in terms of negotiations and benefit-tax arrangements, while existing arrangements appear to distort incentives for acheiving such outcomes. Therefore, the potential waste, even if penalty taxes are not avoided altogether seems trivially small in comparison to the waste from current arrangements).

Illustrating the Method:

-- At Annex A the method is illustrated in the context of how it can guide decisions on the development, and demand revealing governance, of a hypothetical airport in our National Airport System. We illustrate how parties to a privatization contract can, as part of a sequential, adaptive process, arrive at socially desirable outcomes in (a.) the initial award of a management contract to potential bidders in "competition for the field" (b.) decisions on airport capacity investment and pricing) and (c.) compatible decisions on airport development and local land use as well as a means of ensuring that Federal and State/local regulation of the airport will be consistent with principles (including the maximum net social benefit principle) of Executive Orders 12291 and the related principles of Orders 12498 and 12612. The procedures we propose are freely chosen by all participants in the contract -- the several general governmental participants, private sector participants, as well as quasi-governmental or other constituencies seeking a franchise or "voice" in decisionmaking. hypothetical airport will be adjusted for significant or major departures from the status quo for future regulation as well as investment in airport capacity (or pricing/financing configurations) according to the benefits received principle.

-- The Annex also illustrates the operation of the point voting system if it were applied to the national system as a whole. For the national system, we would have approximately 25,000 voting points assigned to these airports, with perhaps 5,000 additional points assigned to perhaps about 400 airports that make up the remaining 19% of enplanements. The objective is now to involve the participants in "public goods" decisionmaking (as well as the mitigation of "bads" in a socially efficient manner. At the macro level (and with reference to Figure 1), consider the search for solutions, in terms of investments in new capacity (at existing or new airports) or financing of common-user technology at the National level, such that the returns will be equal to costs, at the margin, for each change to capacity or technological input in the system. The various institutions will be motivated to achieve this goal if "performance indicators" reflect these objectives and they will advance agenda items that they believe best serve these objectives which reflect their perceptions of individual benefit. The controller(s) or arbiters can estimate the benefits to the various parties and divide the costs of various options in relation to estimated benefits received. If, for purposes of exposition, major and interrelated decisions could be made simultaneously, the arbiters would lay out assigned costs for each subunit, say an airport or airports in a particular region which may be an amount per unit of Ti in Figure 1, with the result that c - Ti is assigned to other units. With the exception of subunit i, the amount of inputs chosen by all others would be Qa. However, subunit i prefers amount Qe rather than Qa if it could pay the opportunity cost to all other subunits which is represented by the "synthetic supply schedule Si = Total cost of inputs (C) less the demand of all others Ai in moving from Qa to Qe. The essence of the E - procedure is the payment of this "opportunity cost" which is the shaded area under the Si curve (the E - cost) plus the additional assigned cost amount (t) in moving from Qa to Qe. The E - cost is the pivot mechanism that motivates the accurate revelation of demands, leading all the subunits to the socially optimum result.

--For the effective further development of our national aviation system, we suggest in the discussion at Annex A that the point voting system we have suggested will lead towords this important results much more effectively than under current arrangements and will address difficult coordination problems with respect to investments in technology at the national level as well as in airport capacity at the regional and local levels.

A second major objective is the mitigation of "public bads" as instanced by a need to, for example, balance the national costs of controlling aircraft noise (e. g. phasing out certain noisy (Stage 2) aircraft in the national fleet or the costs to travellers of inconvenience that result from local restrictions on flights in order to control noise) against the legitimate preferences of localities for a quieter environment. The problems of striking this balance are so great that national legislation contemplates a complicated legal process for bor better achieving it. As suggested by Tullock (1977), Downing and Tideman (1976) and Clarke (1980), the demand revealing or E- procedure may more effectively achieve this balance along the lines shown in Figure 2. In this case, the Federal government and affected segments of the aviation industry will have incentive under the procedure to reveal accurately the costs (shown by the SOC line in Figure 2) to them of particular noise abatement configurations at the local level. In turn, these revealed costs can be balanced against local preferences which can also be revealed through the point voting method. In order to avoid emergence of E - costs in the determination of an optimum level of control, our controllers will attempt to make adjustments in the point pool beyond some initial status quo level of abatement -- say a level that can be achieved by stage three aircraft. For noise restrictions beyond this level, the controller will make adjustments such as a reduction in the State/local point pool to reflect the additional benefits to the locality (the +t cost in Figure 2) and a corresponding increase in the Federal or aviation user point pool (reflected by the -t in Figure 2). Even if the controller's estimate of the desired level of point adjustment are incorrect, the E - Procedure will arrive at the desired result, but an E - cost may be paid as shown by the desire for an additional level of abatement for the locality and an additional E - cost of the amount illustrated by the shaded area.

In Annex A, we illustate a process that we believe would be practical and rather easy to implement so as to permit Federal, state and local government as well as industry to participate in effective public decisionmaking affecting the allocation of resources to investment in aviation capacity and in regulatory decisions affecting the environment. The E-procedure would,given the use of incentives that motivate the actors to respond to measures of social gains less E - costs and other decision costs, to approximate this objective function through the E - point voting system we propose. Annex A illustrates our approach in more detail.

In Annex A, for example, we also illustrate more specifically how the point voting procedure would actually work in practice, such that the Federal government working with airways users is motivated to determine a national cost of control which can be balanced through the E- procedure against the preferences of States and localities, so as to achieve the "highest net social benefit" The process effectively implements a planning procedure whereby the Federal government could achieve noise-compatibility planning, taking into account the technological capabilities of industry and the costs of reducing noise in existing aircraft fleets.

Our work further illustrates an approach to privatization that motivates private contractors and developers to utilize and develop aviation capacity in the most socially efficient manner . At Annex A we illustrate the linkage between our governmental point voting process and "extension of the franchise" to the private sector. States and localities will want to expand capacity in efficient ways while making socially efficent decisions and encourage efficient private sector investment in capacity. At Annex A, we illustrate a sequential adaptive contractual process by which the most efficient decisions are made. This process can stimulate the effective mobilization of private capital investment into airport development. The E - procedure will also effect optimum investment and pricing decisions including the utilization of passenger facility charges for expansion of onsite capacity as well as "off-site" investments in new airports, rail transit, etc. The process also avoids the spectre of price regulation of airports that causes fears on the part of many that "privatization" of airports would cause the resurrection of regulations of the type that has resulted from privatization elsewhere (British price cap regulation stemming from the privatization of several large British airports under one monopoly authority).

As stated in our principles, the administration of the procedure is such that the actual revelation of preferences will be resorted to only on relatively major decisions. Most decisions would be in fact left to administrative procedures or the affected parties themselves the resolution of many other issues. However, the access to the E-procedure and the allocation of costs by benefit/cost criteria will fundamentally change, in game theory terms, the nature of the bargaining set as well as eventual outcomes in what we anticipate to be more efficient directions. Parties will also tend to have large numbers of issues decided by management or through procedures that the participants will use informally to reduce the costs of search and obtaining information.

As the development process unfolds, the organization or sector can move towards the gradual and eventual securitization of airport assets where the shares of participants are say, marketed as securities (each point, for example, may become an E-note backed perhaps the U. S. Treasury, although some other backing could be equally appropriate. General government or the other participants could convert their E-points to E-notes or exchange them with other parties, reserving a few E-points for essential airport decisions made in the future or as the operation of the airport acheives a more, maature, stable equilibrium. With the system, it is irrelevant how many points are held by the government or governments vs. those held by private or quasi-private representatives. We avoid, in short, the pitfalls over questions of majority control that has plauged previous efforts at the creation of private, private-seeking corporations in the United States (See Musof ___).

-- the Federal government or the Congress, however, may wish to hold the "golden share" so as to veto any arrangement or to terminate a contract that may, for example, be tainted by perceived bribery, collusion, or other unfair practices which could arise under the procedures outlined here as in any existing set of institutional arrangements. A termination or contract veto does have significant potential costs, the allowable portion of which might have to be levied against existing airport assets or existing Trust Fund allocations or entitlements. (Annex A, section ____ describes the results of a potential failure and its consequences in more detail).

4. Experimentation and the Evolution of Federal Policy. As an overview document and working paper, we are concerned primarily with a definition of the Federal role in defining permissive policies that could lead to the evolution of an incentive-compatible privatization process, including more cost-beneficial regulation (in the sense of our broad definition) of airports.

-- to the extent a national privatization and de-Federalization effort along these lines can unfold, one could envision the Federal role (which is closely allied initially with the representation of user groups (airline entities, passengers, etc.) as narrowing and focusing on such questions as how National funds are to be allocated through traditional means (existing trust funds and entitlements to, for example, provide essential air service) as opposed to channeling funds resulting from new PFC financed investments in capacity in ways that ensure more efficient investment decisions. This is, of course, inherently a political decisions involving some degree of compromise over what portion of the Federal share in airports (the rectangle at the left of point A) must revert to traditional decisionmaking and processes of political allocation vs. monies raised from PFCs to the right of point A that would hopefully, be made in accordance with the kind of incentive-compatible calculus we have outlined here.

If we can circumscribe the Federal oversight role in this fundamental way, we can see the Federal role in airports in much the same way that we have suggested for the use of demand revealing incentives in the governmental telecommunications arena. The Federal government continues to provide essential interconnection services, such as computer facilities (____) and the configuration of such services could be determined and their costs allocated in accordance with the kind of incentive-compatible decision procedures outlined herein so as to also encourage efficient decisions and resource allocation. (Reference OMB 1983 report on common user information systems and Annex B). In that Annex B, we give major attention to the "network problem" that of providing an essential core of common-user services and technology to local airports in the system.

-- the safety and security of passengers and the use of airports for non-civilian use (and for general aviation use) becomes another major concern for Federal policy. Here, however, we see the results of commanding the use of important commercial resources as explicitly accounted and paid for. Annex B lays out a specific decision-making procedure applied, for example, to national security/emergency preparedness use of commercial telecommunications facilities to show how joint decisions between the Federal government and private parties can be made considtent with efforts to privatize the airport system consistent with national security needs. Examples of PFCs to finance detection devices, how decisions can be made on deployment, other alternative methods that can be emphasized at many local airports (less technology intensive) which would motivate federal overseers working with private parties to arrive at joint optimum arrangements.

-- just as the system motivates efficient cost sharing and joint decisions on common - user systems, the Federal governemnt can be a technical overseer of localized pricing arrangements, issuing guidance on what may constitute unjust and discriminatory charges (see concluding sub-section on Federal assurances). Peak-load pricing can be entrusted with a "system administrator" a la Dolan (1978), constrained to implement such criteria as ensuring that prices will reflect "marginal delay costs" as well as other air traffic control objectives. As explained in a following paper , these criteria may include other broad E-gains as well.

More generally, however, our method encourages, to the extent permitted by law, an efficient structure of prices, so as to extract the highest possible social surplus, while competing away any monopoly rents that might otherwise result from an efficient structure of prices. As explained in Clarke (1980), also Tozzi and Clarke (1983), the method provides a means of acheiving socially desired results, even in the face of decreasing cost "natural monopoly" phenonoma which we believe may be lacking or unimportant in the cases of airport investment and financing decisions. The E-procedure also avoids the traditional rate regulation that the profession and the public associates with privativized airports, including the British price-cap type. While our benefit-cost accounting system has its own costs, we believe these generate significant net social and decisional returns as opposed to traditional rate regulation.

Legislation and Experimentation.

The newly enacted legislation provides a major opportunity for experimentation with the incentive-based procedures outlined herein, as well as to permit flexibility for States and localities to adopt some of the procedures in specific areas of regulation, such as noise control. More generally, the procedures deal directly with the several major policy concerns in the legislation -- noise, as well as slot allocation, and passenger facility charges.

1. Noise. New legislation may provide the opportunity to experiment with alternatives that effectively utilize the considerable information that would grow out of potentially through economic assessments of localized noise control problems. We have illustrated at Annex A how incentive-compatible procedures could help come to grips with this problem in ways that also address principles of Federalism (Executive Order 12618). Towards this end, new legislation could permit States and localities to weigh Federally determined costs of noise control subject to our arbiter's review, balanced by the direct expression of Federal/State/local preferences for various noise control alternatives. As an initial step, and as suggested in Annex A, points could be assessed by the allocator against the Trust fund (the fixed 75% to States ) or the Federal discretionary account or against existing airport assets. The demand revealing rules can then ensure the most efficient social decisions, which can also be made more effectively than through lengthy legal proceedings and EIS processes and the resulting delays that may inhibit economic development.

2. Slot Allocation and New Entrants. New authorizing legislation also directs the FAA to achieve, in very specific ways, the allocation of scarce capacity at airports in ways that will achieve more competitive equity. The method we have developed would work from an existing "distributional" status quo where entitlements to certain critical scarce capacity elements, such as landing slots, are effectively grandfathered or effectively compensated for, and encourage operators to allocate critical scarce capacity through prices, landing fees or other means so as to "maximize the net social benefit". Where the Federal government intervenes to change this result, for say competitive equity or other social equity reasons, our arbiter would make the appropriate adjustments in the Federal account. In this way we can better harmonize the achievement of efficiency with other distributional goals, in a way that will make more transparent the tradeoffs involved. The method also achieves, through a socially acceptable form of privatization, certain efficiency enhancing objectives, such as effective "priority" pricing, and the allocation of slots and/or rights to operate certain noisy aircraft, broad social efficiency objectives which cannot be achieved by simplistic application of these efficiency tools in narrow contexts (i. e. by simplistic attempts to somehow magically "make the prices right").

Passenger Facility Charges. This is the heart of a major Administration initiative to fundamentally change our approach towards the use of the "taxing power" in the financing of airports, and to move from the system of intergovernmental finance and regulation that has distorted airport finance and regulation over the past 60 year. By itself, however, PFC authorizing legislation, if enacted, will not solve the fundamental problems we have implied in this paper and elaborate upon in the following one (Part II). We have suggested what we believe to be a socially acceptable privatization setting for making critical resource decisions involving the raising of PFC revenues and allocating them in ways that will maximize "net social benefit". Again we expect distributional and political distributions will intervene and seek the satisfactory definition of an explicit status quo and the appropriate modifications that would leave to market and the application of demand revealing incentives most of the job of allocating these important resources.

Therefore, the program of implementation with respect to the new authorizing legislation might be undertaken with an eye toward experimentation with processes of efficient social and private allocation. In our more detailed elaboration of the method at Annex A, we have given particular attention to capacity expansion at existing airports and the allocation of PFCs in ways that address the problems of financing new airports and links to other elements of the transportation infrastructure (e. g. high speed rail links and intermodalism). Using our method on the frontier of growth, without the present institutional constraints, in financing and locating new airports is also a central element of our following paper (Part II), suggesting how "privatization plans", and the accompanying plans for use of PFCs can achieve maximum social efficiency, consistent with other goals of National transportation policy, avoiding also certain troublesome impediments to current privatization efforts centering around concern about about "the money going downtown" to some non-transportation purpose. (See also Annex A). We also suggest in that paper some innovative solutions for privatization "with and without" compulsory taxation where communities may have the incentive to privatize an important developmental resource in ways that avoid the efficiency-distorting features of current local property tax systems, and where the benefit-tax adjustment approach to intergovernmental fiscal and regulatory coordination is harmonized with ownership not only with respect to the flow of past subsidies but with the broader tax system as well.

With respect to the development of current transportation policies on privatization (See Annex __), we must not address just question of past subsidy and future tax treatment, but of other existing regulatory controls that currently govern public authorities. These controls are in the form of assurances (existing federal regulation affecting public authorities as well as any privatized airports under some form of general governmental aegis and direction. These wide-ranging array of of assurances (cite ___) which must be complied with by public airport authorities would be complied with by our joint government/private authorities, hopefully accompanied with reasonable interpretations as to their pricing constraints (cite) that are applied to such terms as just and reasonable, non-discriminatory charges. In this paper, we have elaborated at some length for the need for a new look at the meaning of such terms in the context of efficient public goods pricing and application of the benefits received principle. Ideally authorizing legislation of PFCs would clearly articulate these principles in order to ensure effective use of these revenue raising powers as well as permit the Executive and localities to design efficient market approaches, including those elaborated herein to control congestion.

Also for Federal regulation, existing assurances could be incorporated readily into site-specific determinations of the provisional status quo, but as has been demonstrated, efficiency departures from that status quo warrant the particular pricing or share adjustments that have been illustrated above and at more length in Annex A. In our second paper, we describe more fully an approach to privatization that reflects the full diversity of airports in our country, a diversity that might argue for much more flexibility in regulation and in the provision of assurances, as well as diversity in the forms of privatization governing particular cases. In that paper, we will also address issues of harmonizing policies affecting the regulation of public vs. private entities, including the joint entities discussed at length here and addressing also issues of taxation and subsidy (e. g. preferences towards the various entities with respect, for example, to tax-exempt financing advantages).

5. Conclusions and Future Directions. In conclusion, we point to a permissive experimental approach to privatization that will demonstrate the applicability of incentive-compatible decisions mechanisms as a solution to an array of problems affecting the regulation, financing, and privatization of airports. The method is clearly theoretically attractive, but its practical appeal depends on more knowledge and understanding that can be gained only in real world testing.

To implement a demand based incentive system, OMB (1983, 1984) has suggested a four step procedure which would consist of: (1) initial modeling and simulation (initial analysis of the costs and benefits (3) small scale experimentation and (4) wider implementation. Towards this end, we have initially targeted on the provision of air traffic control services and implementation of national noise policy as initial areas for modeling and simulation. These areas would be considered in a program of de-federalization of the economic regulation of airports, such that States and localities as well as operators of airports would increasingly make the key decisions on aviation development.

In terms of initial modelling and simulation, we are focusing on certain critical implementation problems (and alternative approaches for dealing with them) as follows:

-- cost allocation and incentives for effective performance. Although the role played by the cost-allocator is a well established one in terms of commonly accepted benefit-cost principles, the strength of the motivation to follow these principles through an incentives approach which ties the compensation of the cost allocator to social gains less any penalty taxes (E - costs) and administrative costs is one of a number of possible approaches for motivating effective performance, none of which have been properly analyzed or tested in either the theoretical or experimental development of incentive compatible mechanisms. Nor has the acceptability of such a function been evaluated in relation to existing judicial, legislative and executive management institutions, each of which may find reasons to require (other than the golden share) provided by one or more of these institutions. For these and other reasons , we suggest the experimentation with the procedure in one or more privatization settings. At Annex A, we outline some of the difficulties with the procedure that have arisen in the theoretical debate and in experiments, of the laboratory variety, with this and related procedures. Most of the difficulties center on how closely the cost-allocator can approximate the ideal distribution of costs illustrated in Figure 1.

-- coalitions and treatment of E - costs (or incentive taxes). Failure to achieve the ideal distribution, as suggested before, can lead to coalitions and the waste of penalty taxes, at least from the strandpoint of the participants. The distortion of coalitions has been generally suggested to be limited to differences between points B and C, and we conjecture that existing institutions achieve results far inferior to such approximations or achievement of social efficiency. (See Clarke, 1980). As suggested in our principles, waste can be dealt with in several ways , including having some outside party estimate their expected amount and give a competitively determined amount to the parties at contract inception, thus ensuring no waste in an expected value sense (see Annex A). More importantly the waste is one of several decision costs, and if the system is administered properly the participants and the administrator will design of an institutional arrangement which is going to minimize all the relevant decisional costs (including administrative, transactions and negotiating, court and policing costs) while maximizing net social benefit. In this manner, we acheive maximum net gain (Eg - Ec) While we elaborate on the potential advantages of our overall contractual, incentive-compatible approach in the following paper (Part II) in relation to existing institutions, our results remain somewhat conjectural and require real-world testing and experimentation.

Also, the real world applicability and relative theoretical appeal of a myriad of "satisfactory" incentive-mechanisms, including the E-procedure (demand revealing) mechanism introduced here, remains the subject of intense academic debate. The debate extends to the area of experimentation, where theorists argue over the relative merits of different mechanisms in different real world settings. Having advanced one method in this work, we do not have dogmatic views about its superiority (but see Annex ___) and encourage those interested in potential application of the variety of presently available mechanisms to resource allocation problems in such areas as transportation and other resource development areas to advance their ideas.

We also acknowledge room for considerable debate over normative issues governing the use of such mechanisms in real-world decisionmaking. We advance the mechanism here as a means of resolving difficult resource allocational problems in the context of existing institutions. We do so from the normative perspective of "cost-avoidance" (relative to existing institutions), elaborated in Clarke, 1977, 1980. The method is also adopted in a world of freely chosen contract, even though in an existing world of compulsory taxation, it retains compulsory features. We share the preferences of other proponents of the method for a world of non-compulsory local taxation where the compulsory elements of the demand revealing approach would gradually disappear. But this world has normative attributes that would not be universally shared in current institutions (see Annex ___), and even in such a world, certain public goods such as the Interstate highway system, national defense, and the production of knowledge might appropriately would be provided through sources of compulsory taxation.

We have achieved most of our present purposes in showing how our method can be applied to the design of an institutional arrangement that will encourage the socially efficient financing, developing and regulating of the network of local airports in our National suytem. The procedure will deal efficiently with most of what we believe to be the important externalities and public goods problems. This purpose can be accomplished practical, real-world setting of current national and local finance and regulatory institutions, with only modest changes in Federal authorities and private rights and responsibilities. Part II and Annex A provide a further analysis of the problems with existing insitutions, a comparison of our approach with other privatization approaches, as well as a evaluation of the comparative advantages of our method as well as more specific illustrations of its application in a contractual privatization setting.

Annexes

A. A Contractual, Incentive-Compatible Approach to Aviation Development: Examples of the E-Procedure for Budgeting, Investment, Pricing and Contract Governance. (Provides detailed treatment of our extension of the Dolan model and of the approach to resource allocation to the network that is an extension of the FFN/Clarke debate on the merits of demand revealing as a budget mechanism.

B. Discussion of Incentives for Efficient Information Resources Management (OMB 1983) and agency comment on the procedure (OMB 1984) in relation to use of the E-procedure for allocation of resources to air traffic control (see also annex A). Provides discussion also of an approach to regulatory cost-sharing with specific application to telecommunications regulation and the assurance of adequate quality in an air traffic control network. (see also Regulatory Cost-Sharing with Specific Application to Telecommunications Regulation ____ Working Paper, 1983)

D. Application of the Method in Related Contexts - Peak-Load Pricing of Airport Capacity (Dolan), Siting of Hazardous Waste Facilities (Kunreather, et. al. Public Broadcasting (Ferejohn, Forsythe, and Noll (and Clarke, reply).

E. Elaboration of and Simple Explanations of the Theory: Varian (Intermediate Microeconomics, Ch 5, D. Kreps, "A Course in Microeconomic Theory (Ch. 18), Tideman and Tullock "A New and Superior Method", Tideman "Efficent Local Collective Decisions Without Compulsory Taxation"

F. Airport Privatization: DOT Task Force and FAA Legal Analysis, Poole (Reason Foundation) artices, President's Commission on Privatization (FAA).