Would competition between air transport and high-speed rail benefit environment and social welfare?

We develop a duopoly model to analyze the impact of air transport and high-speed rail (HSR) competition on the environment and social welfare. We show that the introduction of HSR may have a net negative effect on the environment, since it may result in additional demand, i.e., there is a trade-off between the substitution effect and the traffic generation effect. Furthermore, if environmental externalities are taken into account when assessing social welfare, the surplus measure may be higher when only air transport serves the market than when the two modes compete. When the airline and the HSR operator decide frequencies, the airline reduces the aircraft size in order to keep load factors high while offering lower frequency and carrying fewer passengers. In these circumstances, the introduction of HSR may be beneficial to the environment on a per seat basis only if the market size is large enough. When the HSR operator decides speed, it has incentive to keep it at the maximum level in order to reduce travel time. When the increase in the emissions of HSR due to the increase in the speed of the train is sufficiently high, the overall level of emissions grows after the introduction of HSR. Therefore, there can be a trade-off between the attractiveness of the service due to reduced travel time and the effects on the environment.