An Incentive Procedure

Incentive-Compatibiity, Regulation and Resource Development: An Application to Airport Development

Summary: Incentive-compatible, or demand revealing, mechanisms can drive public and private joint decisions towards efficient social outcomes, averting the social efficiency distorting features of distributional competition and rent-seeking under current resource allocational (fiscal and regulatory) or other social control arrangements. A demand revealing incentives method, first developed for making common-user decisions within the Federal establishment (OMB, 1983) is outlined here as a means of ensuring more efficient intergovernmental and private regulatory and tax/financing policies and decisions affecting resource development. The method is generalizable to a variety of regulatory and privatization settings, both within as well as outside currently accepted American legal and normative frameworks (e. g. the privatization and governance of State enterprise in the developing world). This paper provides a detailed description of the demand revealing method, and how it can better achieve social efficiency within current institutional arrangements, including the legal and policy frameworks governing the provision of air transportation services in the U. S. economy. A following paper more fully explains the critical public policy problems (tax, financing and regulatory) affecting current institutions which justify use of the method and describes its broader utility in a "transactions costs" contractual framework for evaluating alternative institutional arrangements in the provision of an efficient air transportation system.

1. Introduction.

An incentives procedure initially designed to achieve efficient resource allocational decisions within the Federal government itself is applied here to intergovernmental and private decisions affecting airport development while illustrating the broader applicability to other financing and resource development/ allocational decisions involving government and the private sector. The incentives procedure achieves "efficient regulation" broadly defined and with reference to tools of social control and decisionmaking involving intervententions by the State through taxes, subsidies or other regulatory forms. The method 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. The method is applied to the problem of airport development, while providing a generalizable means of achieving economic, environmental and social regulatory goals, consistent with the gradual privatization of governmental resource developmental activities and the 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 approach we describe is a political economy approach developed over the course of 25 years to try to solve the problem of environmental management through a demand revealing natural monopoly approach (Clarke, 1980, Ch. 5), a solution that was not arrived at fully by Clarke because of interest in the demand revealing mechanism as a solution to the publicm , -- a result )25 years i

Airport Resource Development. The proposals set forth here can achieve the National interest in airport development through an approach to government regulation that more effectively implements the objectives of Executive Orders 12291 (Federal Regulation), 12498 (Regulatory Planning), and 12612 (Federalism).

Our fundamental objective is to advance the current debate on Presidential oversight of regulation with reference to a socially welfare norm, incorporated into the Executive Orders, for achieving the "highest net social benefit", subject to other legal, policy, or constitutional constraints. It has been demonstrted how the process can, for the first time, make such an efficiency norm operational, reconciling the real values of participants in a public interaction and not relying simply on the methods of conventional cost-benefit analysis to determine social prefernces and avoiding 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 acheiving 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.

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" 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 airport development, it is broadly applicable to other (e. g. land or natural) resource development activities and enterprise or sectoral development goals. Aspects of the method relating to its broader applicability to problems of regulation and enterprise governance are set forth in "Privatization, Regulation and the Demand Revealing Governance of Enterprise" (Clarke, 1990)

For the problem of airport development, the method will reduce the drain on the general taxpayer while making air transportation service and the development/operation of airports more responsive to the needs of the public. The proposals seek to 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 government economists who work in the area of government regulatory oversight with a general 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, combined with judicious use of what have come to be known as the new "incentive-compatible" or "demand-revealing" mechanisms, considerable public benefits, nationally and locally, can be achieved. In particular, the new market incentive, contractual methods we suggest will ensure that the considerable potential benefits of privatized local airports can be realized consistent with all of our national and local, including transportation, goals. We have chosen to advance the idea at this time, in part, because somewhat more limited market incentive approaches (e. g. an existing aftermarket in slots at four major national airports) that have been experimented with at several important airports are under public, including Congressional, attack and may require significant revision. Even though the limited slot markets now in place have proved to be a considerable improvement over what existed heretofore, we believe that a considerable progression, not retrogression, should be achieved and in this context advance our broader incentive-compatible, contractual market approach so as to not just preserve, but expand, existing gains.

In this context, it is important to distinguish the approach we describe as rather different from what the U. S. 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 areas like Conrail, Amtrak and Comsat, of which the Federal Government has been a, sometimes unfortunate, partner or (b) the type of local "franchise" monopoly that has characterized the establishment of local cable television systems. _/ The approach to privatization, at least initially, incorporates many of the features of management or performance contracting or "contract (contrat) plan" privatizations that have been achieved in other countries (Cowan, 1990), though the involvement of the government in the approach we propose is guided by incentive-compatible decision rules to ensure that regulations and other forms of social control will harmonize the acheivement of maximum private and social returns in a manner so as to acheive maximum net social benefit. In large part, we take a localized approach to airport development and governance that permits and encourages a significant degree of privatization while ensuring that an important range range of positive and negative "externalities" associated with airport development are addressed. We desribe a "mixed" enterprise approach within an existing tax, subsidt, regulatory framework that moves towards the goal of full privatization, but permits choices of alternative tax and regulatory settings to evolve out of the "mixed" enterprise setting. The approach we recommend, developed in much more detail in papers to follow, has important features of many of the recommendations made by the 1988 Report of the President's Commission on Privatization, including features (such as paassener facility charges or PFCs) likely to be soon embodied in authorizing legislation. 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.

It also ties the exercise of the "taxing power" inherent in

PFC levies or user charges to the possibility of developing approaches to privatization that can create truly efficient solutions to airport development and remove important efficiency-distorting features of the current regulatory and fiscal system.

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. The proposals being developed as part of this work can help achieve this considerable additional potential in terms of lower costs for air travel, even though our approach towards defining the government's role affecting the pricing of airport capacity and services could increase costs for some user groups at some times of the day and more broadly, depending on the range of insitutional innovation to be encouraged redistribute rents growing out of distortions in the current set of tax, subsidy, and regulatory arrangements. _/

We seek to design, however, a fiscal and regulatory approach which is efficient, distributionally stable and individually rational All affected parties bnefit). This is acheivable, particularly under the demand revealing approach, when we have a strogly "positive sum game" and airport development is one of the strongest such candidiates in our view. If so, our search for distributional stability and individual rationality can be satisfied up to the extent that society wishes to protect the interests of all affected parties at an initial distributional status quo, although it may want to change the pattern of distribution in departures from the status quo. Finally, it may wish to change certain priviledged positions in the existing status quo and, in this sense, our solutions may not be distributionally stable or individually rational. Therefore, even though we do not seek perfection, in terms of operationally being able to achieve demonstrable added benefits (relative to the existing status quo) for each and every citizen or interest group, we believe the method will go a long way in that direction (or at least much further than other foreseeable methods that could be presently operationalized) and relative to a distributional status quo that is judged fair and equitable relative to the status quo that exists under current institutions.

2. Background

This paper is the first (Part I) of twoworking papers on airport regulation, finance and privatization. In the research for and preparation of the two papers, entitled "Advancing the Debate on Airport Regulation and Privatization", have become 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. Our emphasis on demand revealing incentives here, however, is in a sense, putting the "cart before the horse" in that 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. For reasons of short-term expediency, 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) to the second working 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 the second paper also, the reader will greater appreciate the great 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 arguement sometimes used in findings of a recent Presidential Commission seems unpursuasive 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 lay out here a method for coping with public goods, natural monololy 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. We are pressed to achieve this, however, somewhat quickly because of rapidly developing legislation and air transportation policies that may be developing in ways that could make the problem worse, rather than better. In this context, we advance possible solutions rather than first deliniating a full statement of the problem, and in this sense may be putting the "cart before the horse".

We do so with the hope that we can have the opportunity to make arguements for a permissive, perhaps experimental, regulatory framework affecting airport development and to experiment with 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 slightly outside the Beltway to some 1000 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 in Part II) but rather with Beltway solutions to Beltway problems, the urge to find solutions to national air transportation dilemmas perhaps in new authorizing legislation to address financing, environmental and economic regulatory problems concerning noise control, allocation of slots at major airports, and authorization for passenger facility charges as well as the funding of FAA 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 clearly outrunning 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 debate with a specific illustration of a contractual, incentive-compatible approach to intergovernmental regulation and fiscal coordination. At first glance, our illustration may appear outlandish and we may have preferred to describe it in our broader development of the contractual method. However, we now present its incentive-comatible features first, including a more specific illustration of its application in a contractual governance setting in annex a of this part. In Part II, we develop the details, including a variety of ways that efficient contracts can be achieved, that is responsive the the diversity of the system and the approaches to privatization and intergovernmental coordination that should take proper account of this diversity.

Incentive-Compatibility and Demand Revealing in Brief: In short, the method we describe here is designed to complement our broad contractual, incentive-compatible approach to be described more fully in Part II. The incentive-compatible approach 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 annex F for a more recent textbook explanation as in Varian, 1989). 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, in the view of most of its students at least, 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 what we call here penalty taxes wll 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 weel 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. In this context, it is instructive to recount the results of OMB's initial effort to stimulate interest in the application of the new incentive-compatible or demand-revealing mechanisms. (Annex B, entitled "Incentives for Efficient Resources Management" includes the original proposal, which has a brief appendix elaborating on the incentive-compatible properties of the demand revealing mechanism as well as a concise summary of agency comment on the mechanism). Government agencies potentially affected by such a decisional approach (at least the twenty or so that commented on the proposal) 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. (A draft reply to some of the criticisms is contained at Annex B.)a

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 Attachment D 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. system using demand revealing decisional procedures in the OMB Report).

--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. We will begin with the concern that any significant degree of privatization in our national airport system does not advance this goal because of certain natural monopoly characteristics. (Footnote here, if not earlier, that our use of the word natural monopoly here is broad, one providing a range of public goods or bads, of which things like decreasing costs are a special case --for our purposes here a useful definition, although we might want to restrict it in other contexts, particularly in Part II). In our expanded treatment of the problem in Part II, we deal with various manifestations of the natural monoploy arguement, incluing 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 ststem make it difficult to acheive completely localized, private solutions to the provision of certain public good elements. The existence of these elements, howver, 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 phenonoma of decreasing costs are simply a special case of the more general public goods problem. (Samuelson, 1955, Clarke, 1971, 1980 Tozzi and Clarke, 1983)

Further, the demand revealing approach outlined here motivates an airport operator to behave in the social interest by "price descriminating" in a socially productive way so as to acheive maximum social returns He must do so in order to successfuly win competitive bids for the management contract in "competition for the field" with other potential bidders for the airport development contract. The demand revealing procedure we suggest also averts so called "distributional competition" in that, by traditional decision rules or voting techniques, a potential contractee might appeal to a majority of interested parties by lowering their payments in excahnge for votes or a favorable decision., The demand revealing procedure always permits our arbiter to make adjustment in the cost shares facing the potential voting parties to account for the influence of any such distributional competition, which he is motivated to avert so as to avoid penalty taxes which would result if any party disadvantaged by such distributional competition to vote against such outcomes (See Clarke, 1980, Ch. 5).

More fundamentally, however, the method we suggest comes to grips with the pervasive government-created monopoly that has gradually grown out of the system of intergovernmental fianance and government regulation so as to impede the effective development of airport capacity in recent years. Demand revealing procedures can help us work out of this pervasive system of controls, to acheive "privatization and de-federalization" in a meaningful sense, avoiding the pitfalls that many might perceive as resulting from more far-reaching attempts to implement such notions (i. .e if we sought , for example, full government or perhaps other forms of partial divestiture of the National Airport System. (We obtain most of the important features of divestiture without actually "selling assets" or formally transferring ownership. Sensible and efficient government regulation would also remain in a system, however, that is more consistent with the guiding principles of the Administration's Executive Order 12291 (Federal Regulation) . On the use of the non-traditional or demand revealing procedures to achieve governement regulation consistent with the Executive Order, see Tozzi and Clarke, 1983).

3. The Method in Economic and Practical Terms.

The authors are economists so it is natural that we spell out our approach largely in economic terms, though we will do so in as concise and understandable way as possible. We illustrate the method here in a continuous choice and graphical setting similar to that of the literature (see annex ___) and in Annex A give several specific discrete case examples in a setting of contract development (footnote that one of the authors originally asked to provide a brief discrete case example in Mushkin, 1972 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 invividually 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).

After illustrating how the method can now be used effectively for airport development decisions, including governmental fiscal and regulatory decisions, consistent with the maximization of both private and social returns, we will deal with some of the "bottom-line" dimensions of the approach as they bear on the concerns of Federal budget and policy officials, the banking community, airport operators and other parts of the affected industryt such as airlines and manufacturers as well as other constituencies affected, for good or bad, by the development of airports. We develop some of these bottom line ideas by way of hypothetical example (particularly in Annex A) to show how the procedure could possibly work in practical terms, dealing with policy and regulatory issues of current concern (like the privatization of a medium-size airport in Albany, New York) as it might fit into larger privatization policies or possible Federal legislative proposals for noise compatibility planning and the Federal preemption of State/local noise restrictions. We develop these ideas, in part, to try to sell the idea to practical people, including those who plan and operate airports, who finance them, who use them (airlines and passengers) and the general citizen and their representatives who live around them. After developing our preliminary assessment in these terms, we point to some ways the method might be initially implemented in terrms of the more practical considerations governing the "how-to-do-it" of privatization.

Illustrating the Method: For practicioners, the method can perhaps be best illustrated or explained 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. Such an illustration is provided in some detail in a "Demand Revealing Parable" at Annex A to show 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 (including peak load pricing of existing airport capacity) 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, however, 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. In this sense, we meet certain fundamental objections that the method has not been fully justified in acceptable normative terms (Clarke, 1977, 1980)

In the simpliest economic terms, and using a framework that we believe could fit comfortably into new authorizing legislation affecting the future finance of airports ( authorization for the levy of passenger facility charges) and for regulating airports with respect to site-specific decisions on the allocation of landing rights and noise control, we envision a set of airport capacity financing and regulatory decisions departing from some existing status quo (defined as point A) in Figure 1. The status quo has both fiscal and regulatory elements we shall describe shortly, but for both elements we seek to move towards the development of existing airports and new airports consisitent with the benefits received principle embodied in Figure 1. To the left of point A, we have evolved a system of subsidy over the last 50 years, starting with the general 50/25/25 Federal/State/local cost sharing formulae of early years towards the somewhat more complex system of grants and entitlements that have evolved over the ensuing years. The source of distribution of past subsidies is not important, except that they often prove to be a critical impediment or point of departure in initiating the process of privatization. Also we seek to esablish an initial allocation that gives the several general government parties an informal entitlement in the form of demand revealing voting points related to some initial values of an airport site (which may depart significantly from any actual value to be determined at a later date).

The initial point allocation (in Annex A, 500 voting points are distributed to the three general government partners in relation to a roughly estimated $500 million in the present value of the status quo for our 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.

At the macro level (Figure 1) in our National system, imagine an array of financing and regulatory decisions that are undertaken over the next decade. For purposes of simplifying the expression of benefits flowing from these decisions, assume a National dimension (affecting the general users of airports such as passengers, airlines, general aviation, etc.) and a State-local dimension (with decisions affecting State/regional economic development, environment/local land use, including such considerations as airport noise). As these decisions are made, we seek a decision-making approach embodying demand revealing decision rules that would move all affected parties from A to B where national and State/local preferences (horizontally summed) yield a socially desired outcome resulting from an optimum array of investment, pricing and regulatory decisions. At point B our independent arbiters have also correctly estimated the cost allocations in relation to benefits received, and no penalty taxes have been generated as is the case illustrated, alternatively, in the form of a potentially more prefereable "macro" result at point C. At this point, a higher level of national airport capacity investment has been acheived when the national level decisions take account of the costs to other parties (state/local parties, private contractees, etc.) defined in curve S' (a synthetic supply schedule showing the cost to others if one party alters the outcome that would otherwise be chosen). This is measured by overall costs of providing airport capacity (at new or existing airports) less the benefits to State/local parties -- that is S' = C - S. The social optimum is defined in this case, at point C where national level benefits intersect S' which is also where total benefits (N and S) intersect at the margin with total cost of providing capacity. Of particular interest is the way in which the penalty tax procedure motivates all concerned parties to determine and reveal an accurate expression of preferences for the move from B to C.

Consider also the cost allocations determined by our arbiter motivated by the objective of minimizing any penalty taxes in the move from the status quo at A to B or C. To minimize any such penalties, the National government (or general users) pay an amount (+t) equal also to (-t) for the State/local account between A and B which can be a simple adjustment of the points in their initial distribution (or point pool) In addition, if the arbiter has not made appropriate adjustments fro the move from A to B, an additional penalty tax (a great deal larger than the amount in Figure 1 shown by the move from B to C, is generated. In either case, the same efficient result (choice of C) would result, but in the case of no initial point reallocation, a larger proportion of resources flow outside of the system not to be used for the purposes of National airport developent.).

Now let us illustrate the same results (not in the context of acheivement of the National public good in a a sequential, adaptive set of financing, regulatory and private investment decisions, but rather the avoidance or mitigation of an environmental "bad" (airport noise) As suggested by Tideman and Tullock (1977), one can illustrate as in Figure 2 the decision-making situation where, say, the benefits to locaslities of noise mitigation should be balanced by the cost to the national economy if such steps were undertaken. We may want also to take account of the wide diversity in the localized benefits and costs of noise control, if for example, the Federal government imposes some uniform technology based standard (as has been anticipated for several years) in the phase-out of noisy aircraft).

In Annex A, for example, we illustrate a procedure where the Federal governement (in this case the FAA initially representing the interests of national airways users) is motivated to determining an accurate national cost of noise control if State/local restrictions were imposed beyond the capabilities of (or the unlimited use at a particular site ) of Stage 3 aircraft. The State and locality affected is subject to (1.) a prior determination of the estimated benefit to it of such a departure and (2.) either the Federal point account or the State/local account can be subject to a penalty tax if a final decision by demand revealing vote reflects benefits and cost different from those estimated by our arbiter.

In Annex A, where we have also illustrated the sequential, adaptive contractual procedure of acheiving privatization the success of the method depends critically upon procedures that will ensure that the costs and benefits are carefully assessed and that points which can eventually become shares in the enterprise reflect appropriate compensation (adjustment of the ts in Figure 1 and 2) for departures from the status quo. Thus privatization contracts and the value of the enterprises we seek to develop are enhanced as we avoid the random redistributions inherent in so much government regulation which is now presently employed without respect to cost, benefits and apprropriate compensation.

Having defined a framework for government regulation, it is relatively easy to see how the process can be used to stimulate the infusion of private capital investment into airport development and to obtain 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).

Figure 3 (drawn from Annex A, figure 1 ) illustrates the objectives being sought if we were to permit and facilitate the efforts of States and sub-national governments to initiate privatizations governed by demand revealing decision rules, perhaps in ways (illustrated at Annex A) to bring other affected parties more effectively, and directly, into the decisionmaking process. For an existing airport, the process might work roughly as follows:

-- define initially the general government shares in the existing airport facility (e.g. 500 shares or points, allocated say 50/25/25 among Federal/State/local general government participants in what is anticipated as a $500 million valued facility for a hypothetical airport

-- solicit private participants in a contract privatization the major decisisions of which are subject to point vote reallocations and demand revealing decisions. A doubling of the size of the facility including capital and other scarce inputs (controllers, capacity enhancements, etc.) are financed outside trust funds and existing FAA appropriations with a 10 year present value of $200 million in costs incurred by private participants, Competitively competitively determined monopoly rents or profits and management fees to the winning contractor add an additional $50 million for a total of $250 million in present value costs collected "on-site" (rectangle A---B in Figure 3).

-- for the facility in question, an optimum pricing approach includes peak load pricing (for effiient allocation of capacity, not revenue raising), collection of PFCs, etc. generating an additional $250 million in "set asides" similar in concept to trust funds but not allocated through existing trust fund political allocational mechanisms. The set asides have both a regional/local and national element with total cost recovery such that marginal social returns are equated with margianal social costs for transportation facilities at point B.

-- the disaggregated details of such an arrangement are illustrated in discussions of the following tables which illustrate discrete-case type decisions over the evolution of the contract in three stages. In the first stage -- initial contract award -- the choice among several (three) competing contractees. The potential bidders set forth an array of performance specifications relating to capacity expansion, investment pricing , etc. and relating to regional economic development, national commerce objectives, and environmental preferences. Aside from any efforts to compete on purely distributional grounds which or arbiter could sanitize by an adjustment of points, the proposals have certain differing benefit attributes which require a reallocation of points to reflect the proportinality of benefits received -- in this case a reduction of 5 in Federal points and an equal 5 point increase in State points. The result, as illustrated at the bottom of Table 1, is the efficient choice of outcomes without any penalty taxes.

-- at a later stage in the determination of contract specifications, major disputes may arise as, for example, in Table 2 showing the resolution of a decision to proceed with a capacity expansion vs. a one-year delay to obtain agreement on a compatible land/use transporation plan being formulated by a regional transportation authority. Potential penalty taxes and concomitant point reallocations can be relatively small (as in 2a) or large (as in 2b) depending on how carefully the expansion is being undertaken in response to local environmental concerns.

-- perhaps, for example, a local environmental concern for noise restrictions at the local airport has led to the delay and must be finally decided as part of our regulatory decision framework (figure 3 reverses the patterrn of preferences for choice of contractors in figure 1) where the locality is assessed points for its somewhat stronger preferences for a more stringent set of noise controls than would be preferred at the state or Federal level. This resolution may lead in turn to quickened resolution of overall capacity expansion differences where the span of disagreement has been narrowed and the final decisions are close to unanimity with no significant possibility that penalty taxes would result(table 2a as opposed to 2b).

-- over time, and with particular reference to Figure 1, we see a potential pattern where the point reallocations balance out (such as in the case of tables 1 and 3 where the federal +t of 5 points balances out the -t in table 3. The DR rule itself may itself be resorted to only on major issues of the type illustrated here, leaving to the affected parties the negotiated resolution of most other issues. However, the access to the DR 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 may also agree to have a large array of more operational decisions determined by management or more conventional decision procedures with the anticipation that individual gains and losses balance out in a probabilistic sense, even though they might utilize the services of our arbiter to make appropriate adjustments with the results do not appear to be so balanced.

-- As the process unfolds, we can move towards the gradual and eventual securitization of airport assets where the shares of thwe participants are say, marketed as securities (each point, for example, may become a Treasury Airport Note ( a TAN). General government participants could remove their TANs or exchange them with other parties, reserving a few points for essential airport decisions made in the future or as the operating 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 (Musoff).

-- 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).

-- at some point, or during the process of privatization, one may ask why the airport, initially owned by the three levels of government in relation to past subsidies cannot be owned in relation to the tax receipts they would reap if all tax preferences and exemptions were removed. We have, of course, begged the question of tax integration up to the very end of our story, not because we lose the appealing features of ther regulatory approach we have illustrated (we can translate the ts directly into tax credits as well as tax increases) but we are not sure that the public authority system will not always be a preferred ownership arrangement, largely for tax reasons. We also want to suggest some ideas, which we will do more fully in Part II, to the effect that the tax treatment of airports should take account of its developmental value and that we might envision even experimenting with non-compulsory forms of taxation where local public goods are financed largely from increments in land value rents. In such a system, problems of tax avoidance become largely a collective exercise in the rational escape from the penalty taxes inherent in the demand revealing approach (see also Tideman, 1985 -- Annex E). In the real world of compulsory taxation, however, and the national provision of transportation, we seek a system of gradual airport privatization where there is reasonable uniform and equitable tax treatment of private vs. public airports, while preserving the incentive-compatible features of a regulatory system in the world where privatized airports are an integral part of the competitive financial markets and the tax system, however imperfect and efficiency distorting that system may be. .alocenjoy o

4. Experimentation and the Evolution of Federal Policies. 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 pork-barrel decisionmaking 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).

-- 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 C in these Airport Privatization Working Papers 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 constrained to implement such criteria as ensuring that prices will reflect "marginal delay costs" (see Tab D). More generally, however, our method encourages, to the extent permitted by law, "efficient price descrimination" so as to extract the highest possible social surplus, while competing away any monopoly rents that might otrewise result from price descrimination. 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. As for effective peak-load pricing, our contractual method would motivate the winning firm to peak-load price perhaps according a Dolan type model that incorporates demand revealing, willingness-to-pay criteria. In this way, our method potentially avoids 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.

New legislation could provide a major opportunity for the Congress to authorize 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.

Noise. New legislation may provide the opportunity to experiment with alteratives that effectively utilize the considerable information that would grow out of potentially thourough economic assessments of localized noise control problems. We have illustrated in the demand revealing parable 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 assessesd 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 intervens to change this result, for say competitve 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 "peak-load"' 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 legislationm, 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 sociaslly accptable 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 intervent 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, we would seek maximum flexibility in the enactment of authorizing legislation to experiment with planning and regulatory approaches elaborated upon here, as well as implement more broadly the principles of efficient social allocation, consistent with currently accepted distributional and social norms.

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, consisitent 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 furture 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 prciples for exercise of the "taxing power" inherent in PFCs and for all aspects of airport pricing. Also for Federal regulation, existing assurances could be incororated 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 part II, 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 flexility 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 repect, for example, to tax-exempt financing advantages).

5. Conclusions and Future Directions. In conclusion, we argue for a permissive experimental approach to demonstration the applicability of incentive-compatible decisions mechanisms as a solution to an array of problems affecting the regulation and 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. As we begin to test the idea, we seek to define 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 and administrative costs (see Annex A) is aone 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 difficuties center on how closely the cost-allocator can approximate the ideal distribution of costs illustrated in Figure 1.

-- coalitions and waste of the penalty taxes. Failure to achieve the ideal distribution, as uggested 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 generaly suggested to be limited to differences between points B and C, and we conjecture that existing exstitutions acheive results far inferior to such approximations or achievement of social efficiency. (See Clarke, 1980). Waste of the penalty taxes 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, yhus ensuring no waste in an expected value sense (see Annex A). The waste is also one of several decision costs, and we seek the 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. While we elaborate on the potential advantages of our overal 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 myrid of "satisfactory" incentive-mechanisms, including the 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 advnced 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 complsory 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 national transportation, defense, and the production of knowledge might appropriately would be provided through sources of compulsory taxation.

We have acheived most of our present purposes in showing how our method can be applied to the design of an institutional arrangement for financing, developing and regulating a real-world, mostly privatized airport in a manner that deals 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 insitutions, with only modest changes in Federal authorities and private rights and responsibilities. Part II and Annex A provide a further anaysis of the problems with existing insitutions, a comparison of our approach with other privatization approaches, as well as a evaluation of the compartative advanages of our method as well as more specific illustations of its application in a contractual privatization setting.

Annexes

A. A Contractual, Incentive-Compatible Approach to Airport Regulation and Privatization

B. Incentives for Efficient Information Resources Management: Summary of Agency Comment: and Some Aspects of the Agency Comment.

C.Regulatory Cost-Sharing with Specific Application to Telecommunications Regulation

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, Tidemand 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 Coimmission on Privatization (FAA).

insitutions, with only modest changes in Federal authorities and private rights and responsibilities. Part II and Annex A provide a further anaysis of the problems with existing insitutions, a comparison of our approach with other privatization approaches, as well as a evaluation of the compartative advanages of our method as well as more specific illustations of its application in a contractual privatization setting.

Annexes

A. A Contractual, Incentive-Compatible Approach to Airport Regulation and Privatization

B. Incentives for Efficient Information Resources Management: Summary of Agency Comment: and Some Aspects of the Agency Comment.

C.Regulatory Cost-Sharing with Specific Application to Telecommunications Regulation

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