Question 1

In March 2021 the Australian Commonwealth Government announced the Tourism Aviation Network Support (TANS) scheme aimed at supporting the domestic aviation industry through the downturn resulting from COVID-19. The media release from the Prime Minister is available at:

https://www.pm.gov.au/media/tourism-and-aviations-flight-path-recovery

The scheme provides half price airfares to a number of domestic destinations.

Part (a)

Illustrate on a diagram of the domestic airline market, the likely impact of the policy on the market equilibrium for domestic air travel. You do not need numbers on your diagram or in your analysis as the emphasis required is on theoretical analysis of this policy.On your diagram make sure you highlight:

1. The price paid by consumers both before and after the policy has been introduced.
2. The price received by airline operators both before and after the policy has been introduced.
3. The quantity of domestic travel before and after the policy has been introduced.
4. The cost of the policy to the government.
5. The likely welfare gains and losses resulting from this policy.

Part (b)

What assumptions have you made in your analysis that will affect the incidence of the subsidy?

Part (c)

Can you foresee any possible unintended consequences of this policy?

Part (d)

Overall, would you recommend the policy? Why?