Tourism Economics and Policy 9781845417338

Table of contents :
CONTENTS
Preface
Introduction
Tourism Demand and Supply
1. The Demand for Tourism
2. Tourism Supply
3. The Price Mechanism
4. Tourism and Market Structure
5. Strategic Pricing in Tourism
Tourism Forecasting
6. Forecasting Tourism Demand
Tourism’s Economic Contribution and Economic Impacts
7. The Economic Contribution of Tourism
8. Measuring Economic Contribution: Tourism Satellite Accounts
9. The Economic Impacts of Tourism
10. Economic Evaluation of Special Events
Tourism Investment and Taxation
11. Investment by Tourism Firms
12. Investment in Tourism Infrastructure
13. Taxation of Tourism
Tourism and Transport
14. Tourism and Transport
Tourism and the Environment
15. Valuing Tourism’s Environmental Effects
16. Economic Instruments to Address Tourism’s Environmental Effects
Tourism, Growth and Sustainability
17. Tourism and Economic Growth
18. Sustainable Tourism Development
Destination Competitiveness
19. Destination Competitiveness
Future Directions
20. Future Directions for Research in Tourism Economics
Index

Citation preview

Tourism Economics and Policy

ASPECTS OF TOURISM TEXTS Series Editors: Chris Cooper (Leeds Beckett University, UK), C. Michael Hall (University of Canterbury, New Zealand) and Dallen J. Timothy (Arizona State University, USA) This new series of textbooks aims to provide a comprehensive set of titles for higher level undergraduate and postgraduate students. The titles will be focused on identified areas of need and reflect a contemporary approach to tourism curriculum design. The books are specially written to focus on the needs, interests and skills of students and academics. They will have an easy-to-use format with clearly defined learning objectives at the beginning of each chapter, comprehensive summary material, end of chapter review questions and further reading and websites sections. The books will be international in scope with examples and cases drawn from all over the world. All books in this series are externally peer-reviewed. Full details of all the books in this series and of all our other publications can be found on http:// www.channelviewpublications.com, or by writing to Channel View Publications, St Nicholas House, 31–34 High Street, Bristol BS1 2AW, UK.

ASPECTS OF TOURISM TEXTS: 5

Tourism Economics and Policy

2nd Edition Larry Dwyer, Peter Forsyth and Wayne Dwyer

CHANNEL VIEW PUBLICATIONS Bristol • Blue Ridge Summit

DOI https://doi.org/10.21832/DWYER7314 Library of Congress Cataloging in Publication Data A catalog record for this book is available from the Library of Congress. Names: Dwyer, Larry, author.| Forsyth, P. (Peter), author.| Dwyer, Wayne, author. Title: Tourism Economics and Policy/Larry Dwyer, Peter Forsyth, and Wayne Dwyer. Description: Second Edition. | Blue Ridge Summit, Pennsylvania: Channel View Publications, 2020. | Series: Aspects of Tourism Texts: 5 | First edition published 2010. | Includes bibliographical references and index. | Summary: “This revised edition incorporates new material on the sharing economy, AI, surface and marine transport, resident quality of life issues, the price mechanism, the economic contribution of tourism, and tourism and economic growth. It remains an accessible text for students, researchers and practitioners in tourism economics and policy”—Provided by publisher. Identifiers: LCCN 2019035501 (print) | LCCN 2019035502 (ebook) | ISBN 9781845417314 (Paperback) | ISBN 9781845417321 (Hardback) | ISBN 9781845417338 (Adobe PDF) | ISBN 9781845417345 (ePub) | ISBN 9781845417352 (Kindle Edition) Subjects: LCSH: Tourism—Forecasting. | Tourism—Management. | Tourism—Government policy. Classification: LCC G155.A1 D96 2020 (print) | LCC G155.A1 (ebook) | DDC 338.4/791—dc23 LC record available at https://lccn.loc.gov/2019035501 LC ebook record available at https://lccn.loc.gov/2019035502 British Library Cataloguing in Publication Data A catalogue entry for this book is available from the British Library. ISBN-13: 978-1-84541-732-1 (hbk) ISBN-13: 978-1-84541-731-4 (pbk) Channel View Publications UK: St Nicholas House, 31–34 High Street, Bristol BS1 2AW, UK. USA: NBN, Blue Ridge Summit, PA, USA. Website: www.channelviewpublications.com Twitter: Channel_View Facebook: https://www.facebook.com/channelviewpublications Blog: www.channelviewpublications.wordpress.com Copyright © 2020 Larry Dwyer, Peter Forsyth and Wayne Dwyer. All rights reserved. No part of this work may be reproduced in any form or by any means without permission in writing from the publisher. The policy of Multilingual Matters/Channel View Publications is to use papers that are natural, renewable and recyclable products, made from wood grown in sustainable forests. In the manufacturing process of our books, and to further support our policy, preference is given to printers that have FSC and PEFC Chain of Custody certification. The FSC and/or PEFC logos will appear on those books where full certification has been granted to the printer concerned. Typeset by Nova Techset Private Limited, Bengaluru and Chennai, India. Printed and bound in the UK by Short Run Press Printed and bound in the US by NBN

CONTENTS Preface......................................................................................................................................... xvii

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Tourism Demand and Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The demand for tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Tourism supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The price mechanism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Tourism and market structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Strategic pricing in tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Tourism Forecasting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Tourism’s Economic Contribution and Economic Impacts . . . . . . . . . . . . . . . . . . . . 5 The economic contribution of tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Measuring economic contribution: Tourism Satellite Accounts (TSA) . . . . . . 6 The economic impacts of tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Economic evaluation of special events. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Tourism Investment and Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Investment by tourism firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Investment in tourism infrastructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Taxation and tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Tourism and Transport. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Tourism and the Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Valuing tourism’s environmental effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Economic instruments and environmental protection in tourism. . . . . . . . . 11 Tourism, Growth and Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Tourism and economic growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Tourism and sustainable development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Destination Competitiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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Tourism Demand and Supply 1 The Demand for Tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 ​Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 ​Factors Influencing Tourism Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.1 ​Demand for tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.2 ​Demand for a tourism product. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 ​Tourism Demand and Elasticity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 ​Price elasticity of demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 ​Income elasticity of demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.3 ​Cross-price elasticity of demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.4 ​Marketing (advertising) elasticity of demand. . . . . . . . . . . . . . . . . . . . 1.4 ​Measuring Demand for International Tourism Arrivals . . . . . . . . . . . . . . . . . 1.4.1 ​Dependent variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.2 ​Independent (explanatory) variables. . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.3 ​Statistical testing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 ​Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17 17 17 18 18 20 21 26 28 31 32 34 35 44 45

2 Tourism Supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 Tourism products are not like other products . . . . . . . . . . . . . . . . . . . 2.2 Factors Influencing Tourism Supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Tourism supply and price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2 Tourism supply and non-price factors. . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Tourism Supply and Elasticity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Production, Costs and Supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.2 Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.3 The relationship between production and costs. . . . . . . . . . . . . . . . . . 2.4.4 External economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.5 Economies of scale versus economies of scope. . . . . . . . . . . . . . . . . . 2.5 Private Costs and Social Costs in Tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 Supply Chain Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6.1 Supply chain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50 50 52 52 54 55 57 59 59 60 62 67 68 69 69 69 72

3 The Price Mechanism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 ​Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Price Mechanism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 ​Excess demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Excess supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

75 75 76 77 78

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3.3 Changes in Equilibrium Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 ​Changes in demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 ​Changes in supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3 ​Changes in both demand and supply. . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 ​Outcome of Market Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1 ​Economic efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 ​Welfare maximization: consumer and producer surplus. . . . . . . . . . . 3.5 ​Limitations of the Price Mechanism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1 Market power influences prices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.2 ​Consumer sovereignty is less powerful than often assumed. . . . . . . . 3.5.3 ​Imperfect information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.4 ​Economic inequality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.5 ​Externalities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.6 ​Economic instability and government intervention in markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 ​Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78 78 79 80 80 81 82 83 83 85 86 86 87 88 89

4 Tourism and Market Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 4.2 Market Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 4.2.1 Perfect competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 4.2.2 Monopoly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 4.2.3 Monopolistic competition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 4.2.4 Oligopoly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 4.3 A Framework for Policy Analysis: S-C-P. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 4.3.1 Market structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 4.3.2 Conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 4.3.3 Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 4.3.4 Public policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 4.3.5 Limitations of S-C-P framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 4.4 Rise of the Sharing Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 4.5 Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 5 Strategic Pricing in Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Cost-Based Pricing Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 Cost-plus (mark-up) pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 Pricing for profit maximization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.3 Marginal cost pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.4 Peak load pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

122 122 124 124 126 127 128 vii

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5.3 Market-Based Pricing Strategies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 Price discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 Two-part tariff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.3 Price skimming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.4 Penetration pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.5 Loss leader pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.6 Promotional pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.7 Bundling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Competition-Based Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Price leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 Predatory pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.3 Transfer pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 Non-Profit Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

130 131 138 139 141 142 143 146 149 149 151 152 152 153

Tourism Forecasting 6 Forecasting Tourism Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 The Forecasting Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Challenges to Tourism Forecasting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 Forecasting Approaches. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 Quantitative Forecasting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5.1 Time series approaches to forecasting. . . . . . . . . . . . . . . . . . . . . . . . . 6.5.2 Econometric (causal) approaches to forecasting. . . . . . . . . . . . . . . . 6.6 Qualitative Approaches to Forecasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 A Hybrid or Integrative Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 The Future: Artificial Intelligence Approaches. . . . . . . . . . . . . . . . . . . . . . . . 6.9 Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

159 159 160 160 163 165 165 172 178 179 184 186

Tourism’s Economic Contribution and Economic Impacts 7 The Economic Contribution of Tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Tourism Increased Sales Revenues for Tourism-Related Businesses. . . . . . . 7.2.1 Effects of increased inbound tourism expenditure on domestic tourism supply. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Tourism Stimulates Local Production and Output. . . . . . . . . . . . . . . . . . . . . 7.3.1 Direct effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.2 Indirect effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.3 Induced effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.4 Leakages from imports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . viii

193 193 193 197 198 198 199 199 199

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7.4 Tourism Creates New Employment Opportunities . . . . . . . . . . . . . . . . . . . . 7.5 Tourism Generates Foreign Exchange Earnings . . . . . . . . . . . . . . . . . . . . . . 7.5.1 Gross versus net foreign exchange effects . . . . . . . . . . . . . . . . . . . . . 7.6 Tourism Creates New Investment Opportunities. . . . . . . . . . . . . . . . . . . . . . 7.7 Tourism Increases Government Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.8 Tourism Assists Regional Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.9 Non-Economic Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10 Conclusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

201 202 204 205 206 207 208 209

8 Measuring Economic Contribution: Tourism Satellite Accounts . . . . . . . . . 8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Need for Improved Statistical Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3 What is a Tourism Satellite Account?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 TSA and the ‘Tourism Industry’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 Constructing the TSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 Direct Versus Indirect Economic Contribution of Tourism. . . . . . . . . . . . . 8.7 The Importance of TSA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8 Regional TSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9 Updating TSA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10 TSA as a Basis for Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10.1 Measures of tourism yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10.2 Tourism productivity estimates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.10.3 Estimating the carbon footprint of tourism. . . . . . . . . . . . . . . . . . . . 8.11 Economic Contribution Versus Economic Impact. . . . . . . . . . . . . . . . . . . . . 8.12 Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

213 213 214 215 215 217 223 224 224 226 226 226 227 228 229 230

9 The Economic Impacts of Tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 9.2 The Purpose of Economic Impact Analysis (EIA). . . . . . . . . . . . . . . . . . . . . 235 9.3 The Tourism Multiplier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 9.3.1 Multipliers based on input-output models . . . . . . . . . . . . . . . . . . . . . 239 9.3.2 SAM multipliers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 9.4 Factors Limiting Tourism’s Multiplier Effects. . . . . . . . . . . . . . . . . . . . . . . . 242 9.4.1 Factor supply constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 9.4.2 Crowding-out effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 9.4.3 Exchange rate changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 9.4.4 Government fiscal policy stance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 9.5 EIA Using Computable General Equilibrium Modelling . . . . . . . . . . . . . . . 245 9.6 Applications of CGE Modelling to Tourism. . . . . . . . . . . . . . . . . . . . . . . . . . 247 9.6.1 Economic impacts of changes in inbound tourism. . . . . . . . . . . . . . 247 ix

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9.6.2 Economic impacts of tourism crises. . . . . . . . . . . . . . . . . . . . . . . . . . 9.6.3 Tourism and poverty alleviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6.4 Assessing tourism policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6.5 Economic impacts of special events. . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 EIA and Policy Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7.1 The importance of general equilibrium analysis . . . . . . . . . . . . . . . . 9.7.2 Impacts are not benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.8 Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

248 248 249 250 251 251 251 252

10 Economic Evaluation of Special Events. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 The Logic of Government Support for Special Events . . . . . . . . . . . . . . . . . 10.3 Economic Evaluation of Special Events: General Issues. . . . . . . . . . . . . . . . 10.3.1 Setting the boundaries of the host region for the event . . . . . . . . . . 10.3.2 Estimating ‘new’ expenditure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4 The Economic Impacts of an Event. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 Challenges to Common Practice Event Assessment Using Standard EIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5.1 Event ‘multipliers’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5.2 Relevance of the labour market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5.3 Treatment of construction expenditure. . . . . . . . . . . . . . . . . . . . . . . 10.5.4 Treatment of taxes and subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6 CGE Modelling of Special Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.6.1 Economic impact assessment of the Melbourne Formula One Grand Prix: An example of a CGE study. . . . . . . . . . . . . . . . . . . . . . 10.7 Wider Effects of Special Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8 Cost-Benefit Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.8.1 Cost-benefit assessment of the Melbourne Formula One Grand Prix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.9 Beyond Economic Aspects: Holistic Event Evaluation. . . . . . . . . . . . . . . . . 10.9.1 An essential role for CGE modelling . . . . . . . . . . . . . . . . . . . . . . . . . 10.9.2 An essential role for CBA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.9.3 Treatment of non-economic impacts. . . . . . . . . . . . . . . . . . . . . . . . . . 10.10 Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

257 257 258 260 261 262 265 266 266 267 267 268 272 272 275 277 278 281 282 283 283 286

Tourism Investment and Taxation 11 Investment by Tourism Firms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 ​Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 Categories of Private Tourism Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2.1 ​Gross versus net investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x

293 293 294 295

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11.3 ​Types of Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 11.4 ​Determinants of Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296 11.5 ​The Investment Demand Curve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 11.5.1 ​Firm’s optimal level of investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 11.5.2 ​Shifts in investment demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 11.6 ​Sources of Capital Investment Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302 11.7 ​Selecting Capital Investment Projects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 11.7.1 ​Estimating cash flows for the project proposals . . . . . . . . . . . . . . . . 303 11.7.2 ​Discounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304 11.7.3 ​The accept–reject decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305 11.7.4 ​Reviewing investment projects after implementation. . . . . . . . . . . . 309 11.8 ​Challenges Facing Private Tourism Investment . . . . . . . . . . . . . . . . . . . . . . . 309 11.9 ​Foreign Direct Investment in Tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 11.9.1 ​Destination ability to attract tourism FDI. . . . . . . . . . . . . . . . . . . . . 312 11.9.2 ​Motives for FDI in tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 11.10 ​Effects of FDI on Host Destination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 11.10.1 ​Potential advantages of FDI to host destination. . . . . . . . . . . . . . . . 315 11.10.2 ​Potential disadvantages of FDI to host destination. . . . . . . . . . . . . . 318 11.11 ​Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 12 Investment in Tourism Infrastructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 12.1 ​Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 12.2 ​Infrastructure Investment: Some General Issues. . . . . . . . . . . . . . . . . . . . . . 331 12.2.1 ​Pricing options for public utilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 332 12.2.2 ​The short-run problem: pricing congestion. . . . . . . . . . . . . . . . . . . . 334 12.2.3 ​Additional capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336 12.3 ​Investment Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337 12.4 ​Infrastructure Provision: The New Private Model. . . . . . . . . . . . . . . . . . . . . 338 12.4.1 ​Regulating private infrastructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339 12.4.2 ​Public–private partnerships. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 12.4.3 ​User pays. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342 12.5 ​Environmental Constraints and Trade-Offs. . . . . . . . . . . . . . . . . . . . . . . . . . 343 12.6 ​Infrastructure and Tourism Growth: Necessary But Not Sufficient. . . . . . . 343 12.7 ​Tourism Infrastructure in Developing Countries. . . . . . . . . . . . . . . . . . . . . . 344 12.8 ​Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 13 Taxation of Tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 ​Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2 ​Types of Tourism Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 ​Tax Incidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

348 348 349 351 xi

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13.4 ​Arguments for Taxing Tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4.1 ​Exporting taxes to non-residents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4.2 ​Provision of public investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4.3 Expansion and diversification of the tax base . . . . . . . . . . . . . . . . . . 13.4.4 ​Overcoming tax base erosion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4.5 ​Taxes to correct for environmental externalities. . . . . . . . . . . . . . . . 13.4.6 ​Taxes to promote tourism destinations. . . . . . . . . . . . . . . . . . . . . . . . 13.5 ​Arguments Against Tourism Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.5.1 ​Excess burden (deadweight loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.5.2 ​Reduced price competitiveness and contraction of economic activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.5.3 ​Risk of excessive taxation of tourism globally . . . . . . . . . . . . . . . . . . 13.5.4 ​Retaliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.6 ​Principles of Intelligent Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.7 ​Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

354 354 356 357 358 358 360 361 362 363 364 366 367 369

Tourism and Transport 14 Tourism and Transport. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375 14.1 ​Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375 14.2 Modes of Tourism Transport. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376 14.2.1 ​Transport networks, gateways and hubs. . . . . . . . . . . . . . . . . . . . . . . 376 14.2.2 ​Intermodality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378 14.3 ​Surface Transport. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 14.3.1 ​Motor vehicles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 14.3.2 ​Bus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380 14.3.3 ​Rail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380 14.3.4 ​Public transport. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 14.3.5 ​Active travel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 14.4 ​Maritime Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382 14.4.1 ​Estimating the economic contribution of a cruise ship visit. . . . . . 383 14.5 ​Aviation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 14.5.1 ​Drivers of aviation growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 14.5.2 Challenges faced by aviation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395 14.6 ​Need for Integrated Transportation Planning to Support Tourism . . . . . . . 399 14.7 ​Tourism Transport into the Future. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 14.8 ​Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 Tourism and the Environment 15 Valuing Tourism’s Environmental Effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407 15.1 ​Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407 xii

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15.2 The Importance to Tourism of a Valued Environment. . . . . . . . . . . . . . . . . 408 15.3 ​The Potential Impacts of Tourism on the Environment. . . . . . . . . . . . . . . . 410 15.4 ​Market Failure and its Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411 15.4.1 ​Lack of property rights to the environment. . . . . . . . . . . . . . . . . . . . 412 15.5 ​Private Goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413 15.6 ​Public Goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 414 15.7 ​Club Goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416 15.8 ​Common Goods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417 15.8.1 ​The tragedy of the commons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 15.8.2 ​Solutions to the tragedy of the commons. . . . . . . . . . . . . . . . . . . . . . 420 15.9 ​Externalities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421 15.9.1 ​Negative externalities lead to over-production and over-consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422 15.9.2 ​Positive externalities lead to under-production and underconsumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424 15.10 ​Valuing Environmental Resources: Total Economic Value. . . . . . . . . . . . . . 426 15.10.1 ​Direct use value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427 15.10.2 ​Indirect use value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427 15.10.3 ​Non-use value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427 15.11 ​Estimating the Non-Use Value of Environmental Amenities. . . . . . . . . . . . 429 15.11.1 ​Stated preference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429 15.11.2 ​Revealed preference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433 15.11.3 ​Imputed valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436 15.12 ​Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439 16 Economic Instruments to Address Tourism’s Environmental Effects. . . . . 443 16.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443 16.2 Economic Instruments for Environmental Protection . . . . . . . . . . . . . . . . . 444 16.2.1 The bargaining solution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444 16.2.2 Internalizing externalities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 16.2.3 Regulation (direct controls). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 16.2.4 Tax on output. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 16.2.5 Tax on emissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454 16.2.6 Subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456 16.2.7 Tradeable permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458 16.3 Complementary Approaches to Environmental Management . . . . . . . . . . . 461 16.3.1 Technology development for energy efficiency . . . . . . . . . . . . . . . . . 461 16.3.2 Voluntary agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462 16.3.3 Education and information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463 16.3.4 New business models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465 xiii

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16.4 16.5

16.6

16.7

16.8

16.3.5 Codes of conduct. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Choosing Between Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tourism and Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.5.1 Effect of climate change on economic growth . . . . . . . . . . . . . . . . . 16.5.2 Tourism affects climate: tourism’s carbon footprint. . . . . . . . . . . . . 16.5.3 Climate change affects tourism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy Responses to Climate Change. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.6.1 Mitigation policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.6.2 Adaptation policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.6.3 The Paris Accord. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Challenges for Tourism Policymakers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.7.1 Uncertainties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.7.2 Developing environmental indicators. . . . . . . . . . . . . . . . . . . . . . . . . Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

466 467 469 470 471 472 474 476 479 481 482 482 483 485

Tourism, Growth and Sustainability 17 Tourism and Economic Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493 17.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493 17.2 Economic Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494 17.2.1 Characteristics of globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494 17.2.2 Concerns about globalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495 17.3 Economic Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496 17.3.1 The effects of economic growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496 17.3.2 Drivers of economic growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497 17.4 Growth, Unemployment and Inflation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503 17.4.1 Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503 17.4.2 Employment/unemployment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504 17.5 The Importance of Productivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504 17.6 Growth-Led Tourism Versus Tourism-Led Growth . . . . . . . . . . . . . . . . . . . 507 17.6.1 Growth-led tourism (GLT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507 17.6.2 Tourism-led growth (TLG) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510 17.6.3 Constraints on both GLT and TLG. . . . . . . . . . . . . . . . . . . . . . . . . . 511 17.7 Does Tourism Growth Reduce Poverty?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512 17.8 Costs of Economic Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517 17.8.1 Growth mania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517 17.8.2 GDP is only a partial measure of economic wellbeing. . . . . . . . . . . 518 17.9 Alternative Measures of Progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 17.10 Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521

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18 Sustainable Tourism Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.2 What is Meant by Sustainability?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.3 Wealth, Wellbeing and Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.4 ‘Weak’ and ‘Strong’ Sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.5 Sustaining and Enhancing Wellbeing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.6 The Ecological Perspective. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.7 The Genuine Progress Indicator. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.8 Tourism and Sustainable Development Goals (SDG). . . . . . . . . . . . . . . . . . 18.8.1 An ecological perspective on tourism stakeholder responsibilities in meeting SDGs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.9 Measurement Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.9.1 Measuring stocks (wealth). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.9.2 Measuring wellbeing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.9.3 Measuring sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.9.4 Building a statistical base for sustainable tourism development: The MST index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.10 Key Enablers of Sustainable Tourism Development. . . . . . . . . . . . . . . . . . . . 18.11 Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

526 526 527 529 530 531 532 535 538 541 544 545 545 548 549 551 554

Destination Competitiveness 19 Destination Competitiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.2 Integrated Models of Destination Competitiveness. . . . . . . . . . . . . . . . . . . . 19.3 The Travel and Tourism Competitiveness Index. . . . . . . . . . . . . . . . . . . . . . . 19.3.1 Construction of the TTCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.3.2 Key enablers of improved destination competitiveness . . . . . . . . . . 19.4 Challenges to Measuring Destination Competitiveness. . . . . . . . . . . . . . . . . 19.5 Destination Competiveness by Niche Market. . . . . . . . . . . . . . . . . . . . . . . . . 19.6 Destination Price Competitiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.7 Measures of Destination Price Competitiveness. . . . . . . . . . . . . . . . . . . . . . . 19.7.1 The Consumer Price Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.7.2 Price indexes of tourism bundles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.7.3 Package tour prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.7.4 Tourism Trade Weighted Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.7.5 Purchasing power parity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.7.6 Comprehensive destination price competitiveness index. . . . . . . . . 19.7.7 Which indicator to use? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

563 563 564 567 569 570 573 574 577 579 580 580 581 581 582 584 586

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19.8 Destination Competitiveness and Resident Quality of Life. . . . . . . . . . . . . . 19.8.1 Measuring quality of life. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.8.2 Quality of life measurement and destination competitiveness. . . . . 19.9 Conclusions and Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

587 587 590 592

Future Directions 20 Future Directions for Research in Tourism Economics. . . . . . . . . . . . . . . . . . 20.1 Tourism Demand and Forecasting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.2 Supply, Market Structure and Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3 Measuring Tourism’s Economic Contribution, Impacts and Net Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3.1 Tourism employment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3.2 Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3.3 Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.3.4 Tourism and transport. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.4 Tourism and Economic Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.5 Sustainability and Tourism Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.6 The Need for a Heterodox Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

599 599 601 603 604 605 605 606 606 608 610

Index............................................................................................................................................613

xvi

PREFACE This revised edition comes a decade after the first edition. The delay is not so much associated with particular difficulties with the writing of it, but more to do with the distractions that took the authors into other areas of research and scholarship at various times during this period. The varied types of events that required the sometimes urgent attention of tourism economists reinforced our view of the importance of economics as a discipline of tourism research and also of educating students about its potential to inform government policy. There have been changes in the tourism economics landscape over this period. We have done our best to incorporate new approaches and ideas influencing tourism economics and policy. As examples, this edition contains discussions of the implications of the sharing economy, affecting industry structure in accommodation and transport, and artificial intelligence (AI) techniques that are being increasingly employed in tourism forecasting. Chapter 14 on Tourism and Transport devotes more attention to surface and marine transport than in the first edition, while Chapter 19 on Destination Competiveness now devotes much more attention to resident quality of life issues. The revised edition also adds material that addresses gaps in the first edition. Additional chapters include The Price Mechanism (Chapter 3), The Economic Contribution of Tourism (Chapter 7), Tourism and Economic Growth (Chapter 17), and Sustainable Tourism Development (Chapter 18) which relies on many of the theses of ecological economics. Cost-benefit analysis no longer has its own chapter, nor do some other topics, but much of the former content is spread over other parts of the book. Every chapter retained from the previous edition has been updated and revised where required. Larry Dwyer and Peter Forsyth have co-authored numerous articles on tourism economics and policy over the years. Much of the book reflects the type of thinking that they have brought to tourism economics during their careers. Wayne Dwyer, Larry’s brother and a specialist in managerial economics, has brought to the team valuable expertise in pedagogy as well as sound insights into economic reasoning.

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The authors wish to acknowledge the support and encouragement of many colleagues over the years. Many of the ideas in the book reflect the contributions that these persons have made to our thinking. We hope we will be forgiven if we do not mention names since we are bound to inadvertently omit someone. To these colleagues, and to the large number of other colleagues who have influenced our views on tourism economics, we extend our gratitude. A special acknowledgement is due to Ehsan Ahmed and Pavlina Jasovska who expertly prepared most of the diagrams in the text. Fundamentally, it is the support of families that is most treasured. We would like to thank Libby, Eve, Joan, Ling, Enya and Jaime for their unfailing support for our work and their loving tolerance of living with workaholics. We promise henceforth to spend more time to smell the flowers and linger longer over drinks. Maybe we will undertake some more tourism. Larry Dwyer Visiting Research Professor, University of Technology, Sydney; Griffith Institute for Tourism (GIFT); and Ljubljana University, Slovenia. Former President of the International Association for Tourism Economics and elected Fellow and past President of the International Academy for the Study of Tourism. Peter Forsyth Adjunct Professor of Economics, Department of Economics, Monash University, Victoria, Australia. Wayne Dwyer Formerly Senior Lecturer, School of Economics and Finance, University of Western Sydney, Australia

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INTRODUCTION Tourism is a major industry globally and a major sector in many economies. Over the past few decades, tourism has experienced continued growth and diversification to become one of the largest and fastest growing economic sectors in the world. An increasing number of destinations have opened up and invested in tourism development, turning modern tourism into a key driver for socioeconomic progress. Tourism has become one of the major international trade categories. For many developing countries, it is one of the main income sources and the number one export category, creating much-needed employment and opportunities for development. A dynamic world economy creates the economic basis for continued growth in domestic and international tourism worldwide. Tourism industry growth consistently outperforms that of the global economy, demonstrating the industry’s resilience in the face of global geopolitical uncertainty, pandemics and economic volatility. In 2018, travel and tourism’s direct, indirect and induced impact accounted for: • US$8.8 trillion contribution to global gross domestic product (GDP) (10.4%); • 319 million jobs – 1 in 10 jobs around the world; • US$1.5 trillion exports (6.5% of total exports, 27.7% of global services exports); • US$772 billion investment (4.5% of total investment). By 2027, travel and tourism is expected to support more than 400 million jobs globally, which equates to one in nine of all jobs in the world; the sector is expected to contribute around 25% of global net job creation over the next decade (WTTC, 2019). International arrivals reached 1.326 billion in 2017 and are expected to grow by 4–5% per annum until 2030 at least (UNWTO, 2018a). Domestic tourism globally is several times larger than international tourism. These facts reveal the importance of an understanding of the role that tourism economics can play in policy formulation. This text identifies and discusses some of the most important topics in tourism economics. We attempt to address each topic in some depth. Much of the tourism literature today appreciates the importance of developing tourism ‘sustainably’. Whatever the precise meaning of this term, an essential element of a sustainable tourism industry is economic viability. It is sometimes forgotten that the concept of sustainability has an economic dimension alongside its social and environmental dimensions. Economic efficiencies result in less use of resources with less adverse social and environmental impacts from their use. While the focus of this book is the economic dimension, the authors are mindful of the importance of the social and environmental effects of tourism development and tourist activity. The more comprehensive is our understanding of the economic 1

Tourism Economics and Policy

issues associated with tourism, as reflected in the decisions made by tourism operators, the behaviour of tourists and policies enacted by destination managers, the more likely it is that economic efficiencies will be achieved in the overall objective of the sustainable development of the industry. Throughout the text, the authors have sought to emphasize the relevance of their investigations for economic analysis and policy formulation in both developed and developing destinations. Whatever the particular destination that is highlighted in the different discussions throughout the text, we would claim that the particular destination context is very often less important than the ideas advanced and the approaches used to address problems and issues. TOURISM DEMAND AND SUPPLY THE DEMAND FOR TOURISM

Tourism demand is the topic of Chapter 1. Tourism demand lies at the heart of tourism’s economic contribution and economic impacts as it is the associated expenditure that determines its economic effects. There are particular problems estimating the demand for ‘tourism’ since ‘tourism’ is not a good or service like others in various industries. This challenge is addressed in subsequent chapters. The chapter distinguishes the demand for travel to a destination and the demand for a particular tourism-related product or service. The implications of the different elasticity measures for business strategy and destination management are explored. The relative importance of the various quantitative and qualitative factors that influence the demand for international tourism arrivals are discussed. The more prominent factors include: income, relative prices, transport cost, exchange rates, marketing expenses, migration levels in host destination, and qualitative factors such as tourists’ attributes, trade and cultural links between the countries, destination attractiveness, special events, natural disasters and social threats. Over time, the modelling of tourism demand has become more sophisticated and more complex and different contexts of study, different data sets, use of different variables and different modelling techniques preclude generalizations of results in many cases. Given the importance of a better understanding of demand for destination management, marketing and policy purposes, tourism demand modelling is continually being refined with more input from the econometrics literature. TOURISM SUPPLY

Chapter 2 emphasizes that the ‘outputs’ of tourism firms are either ‘goods’ (e.g. shopping items) or ‘services’ (e.g. tour guiding) or, most likely, combinations of the two, since most tourism experiences are based on the consumption of a (tangible) product and an 2

INTRODUCTION

(intangible) service. Tourism supply is affected by both price and non-price factors. These include the price of inputs, the level of technology, the number of sellers, the prices of other products, profit expectations and expectations of future prices, weather, and taxes and subsidies. The degree of elasticity of tourism supply depends on the extent to which supply costs change as supply is altered. The costs curves that determine supply reflect the firms’ private costs, neglecting the social costs associated with the supply of goods and services. This results in under-pricing of many products and to their over-production. This issue is addressed in Chapters 3 and 15. Two issues complicate the study of tourism supply. The first is that, unlike many other industries that manufacture products or produce services, there is no ‘tourism industry’. Typically, industries are classified according to the goods and services that they produce. However, all industries are in some degree part of the aggregate activity of tourist expenditure, because tourists spend in all sectors of the economy. Secondly, in the case of tourism the defining element is not the type of commodity produced, but the type of consumer. Thus, the same product or service will or will not be a tourism-related economic activity based on certain characteristics of the consumer, rather than anything inherent in the product or service. Properly incorporated into the supply-based statistical structure, tourism’s relationships to other economic sectors can be recognized. These issues are addressed in Chapter 8 focusing on Tourism Satellite Accounts. The supply chain concept can explain how dif­ferent businesses enter into contractual relationships to supply services, products and goods, and how these goods are assembled into products at different points in the supply chain. More useful managerial implications result if a wider perspective, embracing community goals and sustainability practices, is considered in the developed models. THE PRICE MECHANISM

Chapter 3 identifies the main elements of the price mechanism, a core concept in economics and the basis of applied studies of the effects on output and prices of changes in the demand or supply of products and services. The price system has implications for economic efficiency and welfare maximization related to the concepts of producer and consumer surplus. The price mechanism enables the efficient allocation of resources and maximum welfare of the society only in theory. Market economies do not achieve their full potential for several reasons. These include: the influence of market power on prices, the myth of consumer sovereignty, imperfect information, the perpetuation of economic inequalities, externalities, and economic instability and government intervention in markets. Despite these limitations, the market system provides the basic framework for the analysis of tourism policy in chapters to follow. 3

Tourism Economics and Policy

TOURISM AND MARKET STRUCTURE

Tourism and market structure is addressed in Chapter 4. Market structure analysis is concerned with the effects of industry structure on firms’ conduct and performance. Tourism firms tend to operate within imperfect markets (generally monopolistically competitive or oligopolistic), with smaller firms attempting to distinguish themselves from other firms through product differentiation, whereas larger firms show interdependence in their pricing and output. The oligopolistic nature of much of the tourism industry implies that firms seek to control their supply chains through vertical and horizontal integration and through the formation of strategic alliances. The Structure-Conduct-Performance (SCP) framework is useful for gaining an overall picture of tourism markets, highlighting key features and capturing essential relationships. The market structure within which a tourism firm operates is held to affect the firm’s conduct (decision-making processes) which, in turn, is held to affect the firm’s performance (potential to make profit, increase its market share and achieve efficiency). This linearity may also work in reverse. Public policy (government involvement and influence in the marketplace) affects basic demand and supply conditions in the market, influencing market structure, rewarding or disparaging conduct and, ultimately, conditioning performance. Important ways through which government may differentially affect tourism markets include taxes and subsidies, regulation, price controls, competition laws, and information provision to tourism stakeholders. The rise of the sharing or ‘access economy’ with its new marketplace technology platforms presents tourism supply with both opportunities and challenges. STRATEGIC PRICING IN TOURISM

Strategic pricing in tourism is addressed in Chapter 5. The price that a tourism firm sets for its products is governed by the interplay of a number of factors that are internal and external to the firm. These include the firm’s objectives and ownership pattern, the market structure in which it operates, the degree of competition within the market and the firm’s position within the market, seasonality, government policy, the macro-economic environment, the price of other goods, capacity constraints, and the degree of perishability of its products. Cost-based pricing strategies include cost plus (mark-up) pricing, pricing for profit maximization, marginal cost pricing and peak load pricing. Market-based pricing strategies include price discrimination (first, second and third degree), two-part tariffs, price skimming, penetration pricing, loss leader pricing, promotional pricing and bundling. Competition-based pricing includes price leadership, predatory pricing and transfer pricing. Contributions to our knowledge of how prices are set by firms in destinations can help in the formulation of strategies to improve destination competitiveness. 4

INTRODUCTION

While firms compete through the use of pricing strategies, they can also improve the quality of the characteristics of goods and services. For lifestyle choices, some tourism firms may pursue non-profit maximizing goals. For their part, governments may pursue non-profit or lower profit goals for their tourism-related products and services. Public sector pricing strategies are discussed in Chapter 12. TOURISM FORECASTING Tourism forecasting is addressed in Chapter 6. Forecasting aids long-term planning and is fundamental to the conduct of modern business and destination management. This chapter reviews, compares and contrasts different demand forecasting techniques, highlighting their implications for tourism policy. Tourism forecasting is particularly challenging because: the tourism product is perishable; tourism behaviour is complex; people are inseparable from the production-consumption process; customer satisfaction depends on complementary products and services; and tourism demand is extremely sensitive to natural and human-made disasters. Quantitative forecasting employs mathematical techniques to predict the values of variables of interest. There are two major categories of quantitative models – time series and econometric. Mixed models include both time series and structural elements. Qualitative forecasting is based on the judgements of persons sharing their experience, practical knowledge and intuition. These judgements are often used to moderate or ‘second guess’ quantitative forecasts. There is no single technique that gives best forecasting results in all contexts. Recently, attempts have been made to enhance tourism forecasting accuracy through the integration of quantitative and qualitative approaches. Combined forecasts tend to have greater explanatory power than single approach forecasts and tend to be more accurate. A promising new approach involves Artificial Intelligence (AI) techniques. AI-based systems are designed to bridge the gap between the two traditional quantitative and qualitative approaches. TOURISM’S ECONOMIC CONTRIBUTION AND ECONOMIC IMPACTS THE ECONOMIC CONTRIBUTION OF TOURISM

The economic contribution of tourism, the topic of Chapter 7, refers to the contribution that tourism-related spending makes to key economic variables. Tourism increases the demand for goods and services in a destination and can boost primary, secondary and tertiary industries. Some key effects include: increased sales revenues of tourism-related businesses; stimulation of local production and output; creating new employment opportunities; generating foreign exchange earnings; creating new investment opportunities; increased government revenue through taxation; and assisting in regional development. 5

Tourism Economics and Policy

For any given tourism expenditure shock, the significance of each of the above types of effect depends on circumstances such as factor constraints, import leakages, exchange rate changes, the workings of the labour market, industry interactive effects and the current government economic policy stance. A wide set of effects are associated with tourism growth. More people in a bigger world economy means more tourists, and more tourists increase the pressure on the economic, sociocultural and environmental contexts in which tourism occurs. These issues are addressed in Chapters 17 and 18. MEASURING ECONOMIC CONTRIBUTION: TOURISM SATELLITE ACCOUNTS (TSA)

Chapter 8 addresses the issue of measuring tourism’s economic contribution. Unfortunately, the development of statistical concepts and frameworks for tourism has not kept pace with the changes in the nature and significance of tourism worldwide and its potential for future growth. Since ‘tourism’ does not exist as a distinct sector in any system of economic statistics or of national accounts, its value to the economy is not readily revealed. TSA extract from the national accounts the contribution that tourism makes to each sector of the economy, allowing measurement of the contribution of tourism to GDP and other economic variables, permitting comparison with other economic sectors listed in the national accounts. TSA provide an internationally recognized and standardized method of assessing the scale and impact of tourism spending and its links across different sectors (TSA RMF, 2008). TSA are now being developed at the sub-national level in some countries, providing valuable data on tourism’s economic contribution to regional destinations. TSA also provide a starting point for other more comprehensive approaches to analysing the overall economic impact of tourism. Several measures of tourism yield can be developed using the data contained in TSA. They can also be used to develop valuable economic performance indicators, including measures of productivity, for particular tourism sectors and for the tourism industry as a whole. Another use of TSA is to measure tourism’s ‘carbon footprint’. If the relationship between industry production and greenhouse gas emissions (GHGs) is known, then it is possible to calculate the emissions which are due to tourism as measured by the TSA. THE ECONOMIC IMPACTS OF TOURISM

The economic impacts of tourism are discussed in Chapter 9. These refers to the changes in the economic contribution that result from specific events or activities that comprise ‘shocks’ to tourism demand. Economic impact analyses trace the direct, indirect and induced flows of spending associated with tourism activity in an economy through business, households and government to identify the resulting changes in economic variables such as sales, output, government tax revenues, household income, value added and employment. The total effects are called ‘multiplier effects’. Their size determines the

6

INTRODUCTION

impact of a tourism shock (positive or negative) on important economic variables such as GDP, value added, factor incomes and employment. Estimation of the economic impacts requires economic modelling. In particular, economy-wide effects must be taken into account. An expanding tourism industry tends to ‘crowd out’ other sectors of economic activity while increasing imports. The extent of the ‘crowding out’ effects depends, in turn, on factor constraints, changes in the exchange rate, the workings of labour markets and the macro-economic policy context. Although widely used, multipliers derived from input-output (I-O) tables or a social accounting matrix (SAM) exaggerate economic impacts given their restrictive assumptions that ignore the effects of input and output price changes, changes in the exchange rate and the effect of government fiscal policy stance. The most sophisticated technique for estimating the economic impacts of tourism shocks is computable general equilibrium (CGE) modelling. CGE models guide policymakers in a variety of scenarios arising from a range of domestic or international shocks or alternative policy options. They can be tailored to allow for alternative conditions such as flexible or fixed prices, alternative exchange rate regimes, differences in the degree of mobility of factors of production and different types of competition. CGE models are now increasingly used in tourism economics analysis and in policy formulation. ECONOMIC EVALUATION OF SPECIAL EVENTS

Chapter 10 addresses the assessment of the impacts of special events. Special events provide important recreational opportunities for local residents. Special events increase the opportunities for new expenditure within a host region by attracting visitors to the region. They can stimulate business activity, creating income and jobs in the short term and generating increased visitation and related investment in the longer term. In many destinations, they form a fundamental component of the tourism development strategy On the other hand, special events are recognized as generating adverse environmental impacts such as various forms of pollution and high carbon footprint and adverse social impacts such as congestion and crowding, disruption to local business and community backlash. The chapter emphasizes that the economic assessment models used for estimating the economic impacts of major events should reflect contemporary developments in economic analysis. There are many potential effects of events that are often ignored in standard economic impact analysis. Event assessments need to embrace not only economic but also social and environmental effects. The chapter argues for a greater role for CGE modelling alongside cost-benefit analysis (CBA). These approaches focus on different but essential aspects of the evaluation problem. A holistic approach is proposed that is sufficiently flexible to take account of changes in event evaluation processes and techniques as research progresses in this field.

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Tourism Economics and Policy

TOURISM INVESTMENT AND TAXATION INVESTMENT BY TOURISM FIRMS

Chapter 11 addresses issues of tourism investment. Strong, continuing tourism investment is vital to a strong, successful tourism industry. The broader national and regional benefits that come from a more favourable tourism investment climate include: economic growth; job creation; utilization of domestic resources, particularly renewable resources; skills acquisition; expansion of exports; development of remote areas of the country; and facilitation of increased ownership of investment by the nation’s citizens. The chapter discusses the risk and uncertainty that typically accompany tourism investment decision making generally and reviews the various techniques used to assess return on tourism investment. Of the several different types of accept-reject criteria, the net present value method is preferred on conceptual grounds. Just as for other businesses, tourism firms in the tourism industry must be mindful of adhering to best practice to maximize net returns from investments. Chapter 11 also addresses issues involving foreign direct investment (FDI) in tourism. FDI involves some element of ownership or control over tourism assets. The various motives for foreign direct tourism investment relate to ownership advantages, location advantages and market internalization advantages. The extent of costs and benefits of FDI to a host destination will vary considerably from case to case. Foreign direct tourism investment is best seen as complementary to rather than as a substitute for domestic tourism investment. Strategies involving FDI and multinational enterprise (MNE) involvement in tourism should be examined carefully within the framework of overall development strategies, weighing up the socioeconomic benefits that result against the possible reduced contribution of tourism to the economy. INVESTMENT IN TOURISM INFRASTRUCTURE

Chapter 12 addresses problems of provision of public infrastructure to support tourism development. The operation of tourism facilities and services at a destination depends heavily on the quantity and quality of infrastructure at that destination. Investment in tourism infrastructure aids the development and growth of tourism capacity, supports long-term tourism growth and adds to a destination’s overall competitiveness. Recent years have seen a growth in developed economies in the private provision of infrastructure, especially in terms of airports, terminals, road links and rail. There has also been a proliferation of public–private partnerships (P3) in which the government sets the terms of the contract and may become the ultimate owner, but the private sector builds, and perhaps operates, the facility. Tourism infrastructure typically faces issues of capacity and efficiency. It may become congested as demand presses up against an absolute capacity limit. Where such a limit is not reached, the quality of the service may decline as spaces become crowded, queues lengthen and delays grow. 8

INTRODUCTION

Where tourism infrastructure exhibits monopoly power, it may be necessary to regulate the prices charged. Four pricing strategies of public sector utilities are: profit maximizing pricing; marginal cost pricing; average cost (break-even) pricing; and below-cost pricing (subsidy). Under some pricing schemes, however, the resulting regulated service may be poor and investment inadequate. If tourism capacity is limited because of environmental constraints, it must be ensured that the available capacity is utilized as efficiently as possible. Provision of such adequate infrastructure and its maintenance may be a particular problem for developing countries given lack of local investment, limitations on local legal systems and pressure from donor countries. TAXATION AND TOURISM

Chapter 13 discusses tourism taxation. A well-designed system of tourist taxation can benefit the residents of a destination by helping to finance investment in public infrastructure, expand and diversify the tax base, prevent tax base erosion, shift the tax burden to non-residents, correct for market failure and support the provision of public goods. Taxes also help the community to share in high business profits. On the other hand, tourism taxes can impose costs on a destination, resulting in a contraction of economic activity, a deadweight loss to society and retaliation by other destinations. The reduced price competitiveness of a tourism destination following the imposition of general or specific taxes may be such as to reduce the economic contribution of tourism to the wider economy. In many destinations, taxes are levied on both tourists and tourism businesses at varying rates in an ad hoc fashion, without serious consideration of their economic and social effects. The result is inefficiently high tourism taxes that may well be rational from the viewpoint of the individual country or jurisdiction, but that are too high from a more general, worldwide welfare perspective. The net benefits from tourism development depend critically on how a destination designs its public finance/revenue system to tax travel and tourism. Chapter 13’s ‘Principles of intelligent taxation’ provide a useful industry contribution to assessing the implications of different proposals for taxing tourism. Given the increasing importance of tourism taxation in both developed and developing countries, a greater understanding of the economic underpinnings of tourism taxation and its effects is necessary, so that modelling of tourism taxation can be undertaken and appropriate policies for tourism taxation can be formulated. TOURISM AND TRANSPORT Chapter 14 emphasizes that transport and tourism are complementary industries since both benefit from and foster tourism expansion. The quality of the transport network to and within a destination is an important influence on destination choice. Modes of transport include air, water and surface (road and rail), and various types of transport provision 9

Tourism Economics and Policy

within these modes are possible. Providers are both public sector and private sector and sometimes both simultaneously (P3). Without adequate transport connections, operators and host communities cannot reap the economic benefits of a thriving tourism industry or develop their local economies. Efficient transport networks act as a catalyst to destination growth and development. Intermodality can be a problem when the operators of the different modes used by the tourist – the airline, the rail network, the bus service and the cruise line – are all different companies that do not necessarily coordinate their services. Fuelled by the evolution of social media and smartphones, tourists are making increased use of share transport, particularly in urban areas but also for travel between urban areas. The rise of the sharing or ‘access’ economy, with its new marketplace technology platforms, will continue to change tourist travel patterns, presenting tourism suppliers with both opportunities and challenges. The rapid expansion of cruise tourism is also due to the expectation on the part of destination managers and communities that the provision of infrastructure to host cruise tourism generates substantial economic benefits. However, the economic impact on the local economies of ports of call may not be as great as expected and social and environmental costs may be high. For long-haul trips, air transport is the most effective mode. Earlier restrictive regulations ensured the profitability and stability of the aviation sector, but discouraged tourism. Over time, governments have implemented less restrictive regulation of air transport, leading to more competition, lower fares and greater travel benefitting the tourism industry. The result has been a rapid growth in long-haul tourism alongside a growing market share of air transport in medium- and even short-haul travel. The development of alliances between ostensibly independent airlines has allowed them to create a wider network and services. There are costs to the individual airlines in forming alliances, but in general the benefits appear to outweigh any costs involved. Competition authorities are now paying more attention to the tourism implications of airline mergers and alliances. New transportation technologies are becoming increasingly complex and governments are often in the position of having budgetary constraints and the lack of capabilities to implement them directly. It is thus likely that future transport systems will be the outcome of  private initiatives or P3 schemes, with the market (transport demand) being the ultimate judge of the true potential of a new transport technology. TOURISM AND THE ENVIRONMENT VALUING TOURISM’S ENVIRONMENTAL EFFECTS

Chapter 15 explores issues around valuing the environment. The environment is important in attracting tourism flows with their attendant economic effects. Conservation of valued environmental features can help to maintain tourism visitation and tourism’s 10

INTRODUCTION

contribution to the economy. Overtourism, however, can destroy the very thing that attracts visitors. If there are no markets for some valuable resources and products or if markets do not function properly, the resulting resource allocation will not be optimal. Three major sources of market failure relevant to the environmental impacts associated with tourism include lack of property rights to environmental resources, public goods and externalities. The inevitable result is overuse, abuse, congestion and quality degradation of increasingly scarce environmental resources. Collective action is often required to provide valued goods in sufficient quantities. The environmental impacts of tourism activity may be measured either directly (through their obvious price effects in the marketplace) or indirectly (through the construction of proxy prices). The total economic value of a tourism environmental amenity is composed of its use value and non-use value. Components of non-use value are option, quasi-option, existence, bequest and vicarious value. Chapter 15 discusses various measurement techniques available for valuing environments in tourism contexts and which can be used to inform policymaking. Revealed preference methods tend to be the more reliable, but stated preferences can be applied in more situations and can generate more data. Deliberative approaches to valuation can enhance the effectiveness and perceived legitimacy of policymaking, because of enhanced public participation. Imputed valuation techniques are particularly useful when people actually spend money to prevent loss of an environmental amenity. Given data limitations, it may be appropriate to use a combination of techniques to measure the various environmental consequences that are associated with some tourist activity. ECONOMIC INSTRUMENTS AND ENVIRONMENTAL PROTECTION IN TOURISM

Chapter 16 addresses economic instruments to reduce the adverse environmental impacts of tourism activity. Much of the focus in this chapter is on policies to reduce the negative effects of tourism visitation and/or the production of products purchased by tourists. Market-based instruments such as bargaining, merger, direct controls, tax on output, tax on pollution, subsidies and market for pollution rights provide a strong on­g oing incentive for investment in abatement technology research, development and deployment, and in business efforts to improve energy efficiency. Complementary instruments include technology development and energy efficiency, education and information, adoption of environmentally friendly business models and supplier and visitor codes of conduct. The tourism industry contributes to climate change through its generation of carbon emissions to produce goods and services. Climate change, in turn, has substantial and increasing effects on tourism flows, shifting the market shares of domestic and 11

Tourism Economics and Policy

international destinations. Tourism can and must play a significant role in addressing climate change as part of its broader commitment to sustainable development and the United Nations Sustainable Development Goals (SDGs). Two important challenges that must be overcome to foster the greater use of economic instruments to protect the environment in tourism contexts are coping with information uncertainties and developing environmental indicators. TOURISM, GROWTH AND SUSTAINABILITY TOURISM AND ECONOMIC GROWTH

Tourism and economic growth is the topic of Chapter 17. Tourism continues to grow worldwide, driven by economic, demographic, technological, socioeconomic and cultural forces on both the demand and supply sides. The causes and effects of future tourism growth, on the demand side and supply side, must be understood by tourism stakeholders in both developed and lesser developed countries. Long-run economic growth is examined using the aggregate demand/aggregate supply (AD/AS) model. According to this model, economic growth is caused by two main ­factors – an increase in aggregate demand and an increase in aggregate supply (productive capacity). The main factors influencing long-run aggregate supply (LAS) are the stock of a country’s resources and the productivity of these factor inputs (labour, land and capital). Productivity growth is one of the most important means of achieving sustainable, longterm growth in the material living standards of a destination. Increased productivity increases the power of an economy through driving economic growth and satisfying more human needs with the same resources. There is ongoing debate as to whether tourism is primarily a catalyst for growth, increasing the GDP of destinations (tourism-led growth; TLG) or whether tourism growth is primarily an effect of economic growth in the domestic or international economy (growthled tourism; GLT). The evidence seems to be that it is both. Depending on the context, both TLG and GLT can co-exist for any given destination at any time. Tourism has the potential to contribute to economic growth and poverty reduction, particularly in lowincome developing countries. The sector’s capacity to generate employment and income owing to its backward and forward linkages makes it important for economic diversification and economic growth. Since growth and development are not always linked, tourism development must be defined in terms of the improvement of sustainable human wellbeing, not merely improvement in material consumption. Given the limitations of GDP as a measure even of economic wellbeing, more comprehensive indicators are required to consolidate economic, environmental and social elements into a common framework to show net progress in development processes. 12

INTRODUCTION

TOURISM AND SUSTAINABLE DEVELOPMENT

Chapter 18 argues that while economic growth reflects an increase in a destination’s GDP, the value of economic output, economic development is a broader concept, incorporating an increase in citizens’ quality of life. Recognizing this, the aim of many destinations worldwide is ‘sustainable economic growth’, a concept that includes social and environmental concerns affecting resident wellbeing. Three dimensions of sustainability are distinguished for the tourism industry – economic, social and environmental. Sustainable development meets the needs of the present without compromising the welfare of future generations. For sustainable tourism development, a suitable and ongoing balance must be established between these three dimensions. What determines the ability of a given set of humans to improve their wellbeing (utility) is the quantity and quality of capital assets (wealth) available at the time. Five types of capital are emphasized – produced, financial, human, natural and social. Examination of these types of capital allows a distinction to be made between weak and strong sustainability. Weak sustainability is about maintaining total capital stock without regard to proportions, with one kind of capital being substitutable for another. Strong sustainability does not regard economic, social and environmental capital as substitutable. From the premises of strong sustainability, it follows that economic policy has a responsibility to the greater ecological world, and that sustainable development must therefore take a different approach to valuing natural resources and ecological functions. The global tourism industry has great potential to contribute to the United Nations SDGs. A focused agenda for sustainable tourism can be articulated as a set of 12 aims that address economic, social and environmental impacts. Given the limitations of GDP as a measure even of economic wellbeing, more comprehensive indicators are required to consolidate economic, environmental and social elements into a common framework to indicate net progress in development processes. Several types of ‘green accounting’ or ‘sustainable development’ measures exist but most are in their development stage. The Genuine Progress Indicator, favoured by ecological economists, is discussed. Achievement of a sustainable and desirable future for tourism development requires a shift away from ‘business as usual’ with its focus on maximizing production and consumption (GDP), and towards improving genuine human wellbeing. DESTINATION COMPETITIVENESS Chapter 19 addresses issues of destination competitiveness. Destination competitiveness is linked to the ability of a country or region to deliver goods and services that perform better than other destinations on those aspects of the tourism experience considered important by tourists. Integrated models attempt to bring together the main elements of national and firm competitiveness into one such overall model of destination competitiveness. It is

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Tourism Economics and Policy

difficult, however, to develop such an overall model of destination competitiveness comprising both quantitative and qualitative variables. There is no single or unique set of competitiveness indicators that applies to all destinations at all times. For any given element of destination competitiveness, any number of attributes or indicators may be employed as measures. The importance of competitiveness indicators will vary across locations, depending on product mix and target market segments. For specified market segments, it is possible to identify the most important attributes as perceived by tourists and to compare the performance of different destinations on the selected attributes. Importance Performance Analysis (IPA) offers a basis for strategy development and policy formulation for the different market segments of the destination tourism industry. Destination price competitiveness indexes attempt to compare across different destinations the prices of goods and services that tourists actually buy (as opposed to general price indexes that include goods and services that tourists seldom or never purchase). The type of price competitiveness index employed depends on the research or policy needs at a given time. They will also depend on the data available – some countries have very detailed tourism and price statistics, whereas statistics in other countries can be rudimentary. Tourism economists can help to refine the existing price indicators or develop new ones while assessing their relevance to the different research needs in different destinations. Since resident socioeconomic prosperity is a major objective of achieving destination competitiveness, progress in the development of quality of life (QoL) concepts and measures can play an important role in estimating destination competitiveness. The OECD Better Life Initiative demonstrates progress towards internationally comparable measures of QoL that can inform estimates of destination competitiveness. A shift of emphasis from a ‘production-oriented’ measurement system to one focused on the wellbeing of current and future generations, i.e. towards broader measures of social progress, is guiding the development of internationally comparable measures of QoL that can inform estimates of destination competitiveness. REFERENCES TSA RMF (2008) Tourism Satellite Account: Recommended Methodological Framework. jointly presented by the United Nations Statistics Division (UNSD), the Statistical Office of the European Communities (EUROSTAT), the Organisation for Economic Co-operation and Development (OECD) and the World Tourism Organization (UNWTO). UNWTO (2018) Measuring Sustainable Tourism, Madrid: World Tourism Organization, See http:// cf.cdn.unwto.org/sites/all/files/docpdf/folderfactsheetweb.pdf. WTTC (2019) Travel & Tourism Economic Impact 2019 World, See https://www.wttc.org/-/ media/files/reports/economic-impact-research/regions-2019/world2019.pdf.

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TOURISM DEMAND AND SUPPLY

CHAPTER 1

THE DEMAND FOR TOURISM LEARNING OBJECTIVES After reading this chapter, you should be able to: 1.  Define tourism demand, distinguishing between demand to visit a destination and demand for a particular tourism product. 2.  Distinguish the price and non-price determinants of tourism demand. 3.  Understand the importance of price elasticity, income elasticity, cross-price elasticity and advertising elasticity of tourism demand. 4.  Understand the effects of exchange rate changes on tourism demand. 5.  Understand the importance of modelling tourism demand. 6.  Identify the various quantitative and qualitative factors that influence the demand for international tourism arrivals. 1.1 ​INTRODUCTION Tourism demand refers to the willingness and ability of consumers to buy different amounts of a tourism product at different prices during any one period. The demand for any tourism good or service is influenced by numerous quantifiable and non-quantifiable factors. 1.2 ​FACTORS INFLUENCING TOURISM DEMAND The market demand function for a product or service is the relationship between the quantity demanded of the product and the various factors that influence this quantity. For tourism demand, we may distinguish between the demand for travel to a destination (e.g. visitor arrival numbers or expenditure) and the demand for particular tourism-related products or services (e.g. hotel rooms, restaurant meals, sunglasses or cabins on cruise ships).

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TOURISM DEMAND AND SUPPLY

1.2.1 ​DEMAND FOR TOURISM

One helpful way to investigate the travel decision is to distinguish two broad determinants of the demand for tourism: price factors and non-price factors. • Price factors. The cost of tourism to the visitor includes the cost of transport services to and from the destination and the cost of ground content (accommodation, tour services, meals, entertainment and so on). The prices paid by an international tourist who must convert one currency into another are also influenced by prevailing exchange rates. • Non-price factors. These include socioeconomic and demographic factors such as population, income in origin country, education level, availability of leisure time, migration stock, and qualitative factors such as consumer tastes, tourist appeal, destination image, quality of tourist services, special events, destination marketing and promotion, cultural ties, weather conditions and so on. Non-price factors can have positive or negative effects on tourism demand. Thus, special events tend to boost tourism demand to a destination, while the incidence of terrorism tends to lessen it. 1.2.2 ​DEMAND FOR A TOURISM PRODUCT

The most important variables affecting the demand for any good or service include its price (Px), consumer income (Y), the number of consumers in the market (N  ), the price of related products (substitutes Ps and complements Pc), consumer tastes (T  ), level of marketing/promotion expenditure (M), and other variables such as consumer price expectations, interest rates, etc. We can specify the following general function of the demand for a commodity (Qx) measured in physical units.

Q x = f (Px, Y, N, Ps, Pc, T, M, …)

(1.1)

The dots at the end of Equation 1.1 refer to any of the determinants of demand that are specific to the particular circumstances of a product or destination. The analyst must not omit important variables from the demand equation. On the other hand, including too many explanatory variables may lead to econometric difficulties and may make it unnecessarily expensive to collect data. Data can be collected for each of the variables over time (that is, yearly, quarterly, monthly), or for different economic units (individuals, households, origin and so on) at a particular point in time. The former is called ‘time series data’ while the latter is called ‘cross-sectional data’. The type of data used in demand estimation is often dictated by availability. Sources of data for estimating tourism demand can come from a variety of sources including government statistics, industry reports and consumer surveys. 18

THE DEMAND FOR TOURISM

1.2.2.1 ​Tourism demand and price

A market demand curve is the horizontal summation of individual demand curves. It shows the various quantities of the commodity demanded in the market per unit of time at various alternative prices while holding everything else constant. Changes in the price of a product, holding other things constant, affect the quantity demanded and are represented by a shift along the demand curve. Economic theory suggests that price and tourism demand have an inverse relationship. As price falls, the quantity demanded for a tourism product or service should rise, and as price rises, the quantity demanded should fall. This is shown in Figure 1.1a. The inverse relationship between quantity demanded and price (commonly called the law of demand) captures the income effect and substitution effect evident in buyer behaviour. • Income effect. As the price of a tourism product falls, its price relative to consumer income falls, and consumers can afford more of the product given the same income. • Substitution effect. Consumers can buy more of the now relatively cheaper tourism product, substituting it for other now relatively more expensive products. By way of example, as the price of a particular travel destination falls (say a particular promotion reduces the price of airfare/accommodation throughout the USA), persons may undertake more travel to the USA or longer travel or more expensive travel (income effect). Persons may also be inclined to visit the USA rather than other now relatively more expensive destinations (substitution effect).

Figure 1.1  ​(a) Price changes and quantity demanded, (b) Non-price changes in demand 19

TOURISM DEMAND AND SUPPLY

1.2.2.2 ​Tourism demand and non-price factors

Following standard theory, if non-price factors change in favour of purchasing a tourism product, demand for that product will increase with more of the product demanded at each price. This could occur if, for example: population increases; average household income increases; preferences change favourably; consumers expect the product’s price to rise shortly; the amount of available leisure time increases; the price of substitute products rises or the price of complementary products falls. Conversely, if non-price factors change to work against purchasing the product, demand for a tourism product will decrease with less of the product demanded at each price. Figure 1.1b shows the effects of non-price influences on tourism demand. Changes in these determinants cause the entire demand curve to shift left or right, indicating a reduction or increase in demand at any given price. 1.3 ​TOURISM DEMAND AND ELASTICITY In broad terms, elasticity describes the sensitivity of one variable to changes in another variable. Four forms of elasticity are distinguished here: • Price elasticity: the extent to which demand for a tourism product changes given a change in its price; for example, an increase in airfares will, other things being equal, result in reduced passenger numbers for air travel. • Income elasticity: the extent to which demand for a tourism product changes given a change in the level of consumer income; for example, as individual and national wealth rises, more air travel or leisure cruising will result. • Cross-price elasticity: the extent to which demand for a tourism product changes due to changes in the price of substitute and complementary goods; for example, the demand for air travel within Europe will be affected by changes in the price of rail or bus travel (substitute goods) or changes in the price of accommodation or car hire (complementary goods). • Marketing elasticity: the responsiveness of sales to changes in marketing/advertising expenditures; thus, a tour operator may advertise on radio or TV or a destination may promote itself in newspapers and magazines, generating increased visitation and sales revenues. Broadly, demand for a tourism product or service is classified as: • Price elastic when tourism demand is relatively sensitive to changes in prices or income. This tends to be the case when a particular tourism product faces competitive substitutes or is relatively expensive. 20

THE DEMAND FOR TOURISM

• Price inelastic when tourism demand is relatively insensitive to a change in prices or income. This tends to be the case when the particular tourism product faces few, if any, substitutes or is relatively inexpensive. 1.3.1 ​PRICE ELASTICITY OF DEMAND

Figure 1.2 shows two demand curves faced by an airline. It depicts a situation where the demand for holiday travel is more price elastic than the demand for business travel. Numerous studies have found business travellers to be less responsive to changes in prices than leisure travellers. Suppose DH is the demand for holiday travel and DB is the demand for business travel. Business travel is likely to be less sensitive to airfares than leisure travel for several reasons: • The total cost of travel includes a value of time component and business travellers value time more highly than do leisure travellers. • Business travellers may be more concerned to maximize their productivity while travelling, and therefore may be more willing to pay for ‘higher quality’ services that allow last minute bookings, changes to itineraries and more comfortable seats. • Business passengers generally have fewer substitute transport modes and itineraries available than leisure passengers. • For business travellers, costs are absorbed by the firm, which makes the individual traveller less sensitive to price changes.

Figure 1.2  ​Price changes, elasticity, and change in quantity demanded

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TOURISM DEMAND AND SUPPLY

The implications of the different elasticities of the two market segments are as follows: • At price P 0 the demand by holiday and business travellers will be equal, with Q 0 air services demanded by each group. • If the price of an air ticket were to increase to P 1, the quantity of air services demanded by holiday travellers would fall by much more than the quantity of air services demanded by business travellers. Following the price rise, the quantity demanded by holiday travellers is H1, while that of business travellers is B1. • If the price were to fall to P 2 , the quantity of air services demanded by holiday travellers would be H2 and that by business travellers would be B 2 . In this case, the increase in quantity demanded of air services by holiday travellers would increase by more than the quantity demanded by business travellers. We can estimate price elasticity as an arc or point measure. The arc price elasticity of demand for any particular tourism product (ε) is expressed as:

ε=

percentage change in the quantity demanded of the tourism m product percentage change in the price of the tourism pro oduct

Suppose a boutique Paris hotel drops the average price of its rooms by 10% and consequently its occupation rate increases by 20%.

ε=

% change in quantity demanded 20% = = −2.0 % change in price −10%

Note: when discussing price elasticity of demand, we ignore the negative sign (the sign will always be negative for a downward sloping demand curve) and just focus on the absolute figure. • The arc price elasticity of demand is 2.0. This simply means that for every 1% change in the price there is a 2% change in the quantity demanded, suggesting that customers are price sensitive to that product (demand is price elastic). Given this, the hotel might maintain high sales or increase its total revenue in a competitive environment if it keeps its room prices low. • Point elasticity of demand measures the price elasticity at a specific point on the demand curve. Because point elasticity is for an infinitesimally small change in price and quantity, it is defined in differentials as follows: dQ/Q/dP/P = dP/dQ.P/Q. Several factors influence how a consumer perceives a given price and how price sensitive they are likely to be with respect to different purchase decisions. Some of the more important are listed in Table 1.1. 22

THE DEMAND FOR TOURISM

Table 1.1  ​Factors affecting price elasticity of demand for a tourism good or service Closeness of substitutes effect: The more substitutes for the product, the more sensitive its demand will be to price changes. Thus, a large number of motels along a highway may help to increase the price elasticity of demand for an individual property. Difficult comparison effect: Buyers are less sensitive to the price of a known or more reputable product such as an international chain hotel when they have difficulty comparing it to potential but lesser known alternatives. Switching costs effect: The higher the product-specific investment a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives. Thus, a traveller may pay more on certain airlines to accumulate loyalty points. Price-quality effect: Buyers are less sensitive to price if they think that higher prices signal higher quality. Products for which this effect is particularly relevant include image products, exclusive products and products with minimal cues for quality. In a tourism context, the demand for five-star accommodation, for example, tends to be less price elastic than the demand for budget accommodation. Expenditure effect: The price elasticity of demand for a product depends on the importance of the product in consumer budgets. Demand tends to be more price elastic for more expensive products. Thus, the demand for international holidays tends to be more price sensitive than the demand for domestic holidays. End-benefit effect: The relationship a given purchase has to a larger overall benefit can be divided into two parts: – Derived demand: The more sensitive buyers are to the price of the end benefit, the more sensitive they will be to the prices of those products that contribute to that benefit (e.g. transport costs). – Price proportion cost: This refers to the percentage of the total cost of the end benefit accounted for by a given component that helps to produce the end benefit. The smaller the given component’s share of the total cost of the end benefit (e.g. administration fee for currency exchange), the less sensitive buyers will be to changes in the component’s price. Shared-cost effect: The smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be. Thus, business travellers are less sensitive to accommodation price changes that their employer funds. • Fairness effect: Buyers are more sensitive to the price of a product when the price is outside the range they perceive as ‘fair’ or ‘reasonable’ given the purchase context. Thus, a tourist may avoid a restaurant complex altogether in a period when prices are hiked up. 23

TOURISM DEMAND AND SUPPLY

Framing effect: Buyers have greater price sensitivity when the price of items is paid separately rather than as part of a bundle. Fast food restaurants know this when bundling items for purchase. Time effect: The price elasticity of demand is greater the longer the time allowed for consumers to adjust to a change in price. It takes time for consumers to learn about the availability of substitutes and to adjust their purchasing patterns to a price change. Price expectation effect: Whether a price change is considered to be permanent or temporary (e.g. a ‘one day sale’ of discounted airfares) will call forth a demand response different from an expected permanent decrease of the same magnitude. Bandwagon effect: A situation where people demand a commodity because others are purchasing it, and it is considered ‘fashionable’ to ‘keep up with the Joneses’. The market demand curve for the product will then be less price sensitive than otherwise. Some tourism destinations become fashionable for a time, commanding higher priced services, as tourism destination life cycle models indicate. Snob effect: The opposite of the bandwagon effect as some consumers seek to be different and exclusive by demanding less of a product as more people consume it. This tends to make the market demand curve steeper with quantity demanded less sensitive to price reductions. The demand for low-cost aviation carriers may foster a snob effect among a proportion of travellers, who patronize the full-service carriers. Veblen effect: A situation where some individuals seek to impress others by demanding more of certain products or services as their prices rise. Also known as ‘conspicuous consumption’, tourism examples include the demand for a stay at an exclusive island resort whose facilities are no better than some other less expensive but less prestigious competitors. This results in a steeper market demand curve reflecting less price sensitivity by certain tourists. Source: Based on authors’ extension of Nagle and Holden (2002), pp. 84–104

1.3.1.1 ​Elasticity and total revenue

Tourism managers need a good working knowledge of price elasticity of demand because it relates directly to total revenue. The price elasticity of demand indicates the effect that a change in price will have on the total revenue generated. This is because total revenue, TR, is equal to price (average revenue) times the number of units sold. The price elasticity of demand for a product or service is an important indicator of how TR received from

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THE DEMAND FOR TOURISM

the sale of that product varies as its price changes. Thus, a small percentage price increase in a tourism-related product: • reduces TR if demand is elastic (ε > 1); • leaves TR unchanged if the elasticity is unity (ε = 1); • increases TR if demand is inelastic (ε  0). For instance, if a 15% rise in Thailand’s household annual income brings about a 25% rise in overseas travel by Thais (ceteris paribus), the income elasticity of demand for overseas travel by Thais would be

εy =

% change in demand for overseas travel 25% = = +1.67 15% % change in income

This suggests that outbound tourism by Thais is income elastic. For every 1% rise in real income there is a 1.67% rise in the demand by Thais for overseas travel. Luxury goods are those that have an income elasticity of demand exceeding one (εy > 1). This might include first class air travel, five-star hotel accommodation or Michelinstandard dining. Necessities have a low income elasticity of demand, either at zero or marginally above zero. Necessities include basic foodstuffs such as bread and salt. This might include the demand by residents for travel on local public transport. Inferior goods imply a negative relationship between income and tourism demand. The income elasticity of demand is less than zero (εy  1) when tourism supply is relatively sensitive to changes in price. The firm may have unused capacity that it can tap or the resources it requires for expansion are readily available. In the extreme, supply may be perfectly elastic (supply changes infinitely in response to a change in price), if resources are readily available to support any expansion.

Figure 2.2  Elasticity of supply 58

TOURISM SUPPLY

• Price inelastic (Es  depreciation, then net investment is positive, tourism firms will expand their capital base, and their productive capacity rises. • Gross investment  0, accept the investment. A positive value means that the project makes a positive dollar return, after allowing for the cost of debt. • A zero amount means that the future income from the project measured in today’s dollars is equal to the present outlay measured in today’s dollars, assuming that the discount rate is equal to the borrowing interest rate. • If NPV  1 should be accepted and a project with PI  1 implies NPV > 0 and PI  0, IRR > discount rate; if NPV = 0, IRR = discount rate; PI > 0. • Reject if NPV