Wednesday, March 23, 2011

Real-Life Laffer Curve (or, Arbitraging International Travel)

. Wednesday, March 23, 2011

So, last week I traveled from Chapel Hill to Montreal. But I did not fly to Montreal. I flew to Burlington, VT and then took a Greyhound bus to Montreal. The total cost of the roundtrip, including all fares and taxes, was approximately $290. Why didn't I just fly into Montreal? Because it would've cost around $500-600, or 66-100% more, depending on the days/times we chose to fly. And why is that? Apparently, a big chunk of it is airport fees, traveler's taxes, security taxes, etc. Here is a list of some of them on the Canadian side, but the U.S. has its own "international arrivals" tax, among others. The long and short of it is that it was much cheaper for me to fly domestically and then drive -- even if I'd had to rent a car for a day -- than to simply fly.

Of course, that means that both Canada and the U.S. got zero of these extra taxes from me and my travel companions. We would have been willing to pay some extra to avoid the hassle of a 2-hour bus ride (although, in the end, it was a comfortable trip that allowed us to see some nice landscape that none of us had seen before), and the cost of the bus tickets ($23 per person each way). But by setting the fees so high that the cost of the trip effectively doubled, we were much better off by taking the Burlington-Montreal bus route. The three of us ended up saving nearly $1,000 in aggregate. We were on the wrong side of the Laffer curve: higher taxes drove us out of the market, and Canada and the U.S. got zero extra revenue from our trip.

Now this may not be true for the overall public. My impression from ISA is that most of those traveling from the U.S. flew straight in, and obviously those traveling from Europe or elsewhere did the same. Some of them didn't really care how much it cost, because someone else was paying for it. But many U.S. travelers would have taken the Burlington route if they'd known about it in advance. And if we know anything about arbitrage opportunities, it's that they don't tend to last very long: word gets around. Next time more people will likely choose that option. Of course, if too many people do this the governments may just put a tax on the Greyhounds, but considering that the purposes of the airport taxes -- extra security, airport improvements, etc. -- are airport-specific, such moves may not be politically appealing.

The upshot? If you travel to Montreal, fly into Burlington and take the bus. And if you set tax policy, take incentives into account.

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Real-Life Laffer Curve (or, Arbitraging International Travel)
 
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