In: Finance
Airlines now charge passengers a fee for each piece of checked luggage, but they do not charge for carry- on luggage brought onto the plane. If overhead luggage containers fill up, the airline then checks luggage for free at the gate. Describe the effects of this system on the number and size of carry- ons brought onto the plane and the efficiency of the allocation of overhead space.
Before passengers were charged for checked bags, they would choose whether to check bags or carry them on based on whether they were willing to trade time for the hassle of dealing with carry-on bags. That is, passengers who valued saving time by not having to deal with baggage claim more than the cost of dealing with carry-on baggage will choose to carry on. The fact that passengers are now charged for checked baggage but not for baggage carried onto the plane will inefficiently allocate overhead space. Passengers will carry on more and bigger bags to save the fee charged, resulting in full overhead luggage containers. Overhead space will go to the first passengers on the plane, rather than being distributed more evenly. Bags checked (without a charge) at the gate forces some who would choose to carry on even without the fee to have to check, which is a loss in efficiency.
Those who elect to carry on to avoid the fee, but would rather check their bags, also result in an inefficiency.