ASPECTS OF TOURISM TEXTSSeries Editors: Chris Cooper (Oxford Brookes University, UK),C. Michael Hall (University of Canterbury, NewZeaiand)and Dallen J. Timothy (Arizona State University, USA)

Tourism Economics and Policy

Larry Dwyer, Peter Forsyth and Wayne Dwyer

CHANNEL VIEW PUBLICATIONSBristol • Buffalo • Toronto

CONTENTS

Preface xvii

1 Overview 1Tourism Demand and Forecasting 5Tourism Supply and Pricing Strategies 8Distinguishing the Economic Contribution, Economic Impacts

and Net Benefits of Tourism 11Measuring Tourism's Economic Contribution, Impacts

and Net Benefits 12Tourism Investment 19Taxation and Tourism 23Tourism and Aviation 25Tourism and the Environment 26Destination Competitiveness 31Directions for Tourism Research 33

Tourism Demand and Forecasting 35

2 Demand for Tourism 372.1 Introduction 372.2 Factors Influencing Tourism Demand 37

2.2.1 Demand for travel to a destination 382.2.2 Demand for a tourism product 38

2.3 Tourism Demand and Elasticity 412.3.1 Price elasticity of demand 422.3.2 Income elasticity of demand 472.3.3 Cross-price elasticity of demand 482.3.4 Marketing elasticity of demand 54

CONTENTS

2.4 Modelling Tourism Demand 542.4.1 Model specification 552.4.2 Collecting data on the variables 55

2.4.3 Specifying the form of the demand function 562.4.4 Testing the econometric results 57

2.5 Measuring Demand for International Tourism Arrivals 592.5.1 Dependent variables 602.5.2 Independent (explanatory) variables 61

2.6 Conclusions and Policy 79

3 Forecasting Tourism Demand 833.1 Introduction 833.2 The Importance of Forecasting in Tourism 84

3.3 Forecasting Approaches 883.4'" Qualitative Approaches to Forecasting 893.5 Time-Series Approaches to Forecasting 94

3.5.1 Components of a time series 993.5.2 Smoothing techniques 1033.5.3 Forecasting tourism arrivals using time-series

analysis 1093.5.4 Shortcomings of time-series approaches 110

3.6 Barometric Techniques 1103.7 Econometric Approaches to Forecasting 114

3.7.1 Specifying an econometric model 1153.8 The Quest for Forecasting Accuracy 122

3.8.1 Evaluating forecasts 1223.8.2 No single 'best approach' 122

3.9 A Hybrid or Integrative Approach 125

3.10 Conclusions and Policy 129

Tourism Supply and Pricing Strategies 1334 Tourism Supply 135

4.1 Introduction 1354.1.1 Tourism is not like other industries 1364.1.2 Tourism products are not like other products 137

4.2 Factors Influencing Tourism Supply 1394.2.1 Tourism supply and price 1394.2.2 Tourism supply and non-price factors 139

4.3 Tourism Supply and Elasticity 1414.4 Production, Costs and Supply 143

V I

CONTENTS

4.4.1 Production 143

4.4.2 Costs 1444.4.3 The relationship between production and costs 1464.4.4 Private costs and social costs in tourism 152

4.5 Consumer Surplus and Producer Surplus 1534.6 Tourism Market Structure 154

4.6.1 Structure-Conduct-Performance 1544.6.2 Market structure 1544.6.3 Conduct i 1644.6.4 Performance 1664.6.5 Public policy . 167

4.7 Tourism Supply Chains and Firm Structure _ 1674.7.1 Vertical integration 1684.7.2 Horizontal integration 1684.7.3 Strategic alliances 171

4.8 Conclusions and Policy 172

5 Strategic Pricing in Tourism 1765.1 Introduction . 1 7 6

5.2 Competitive Strategies M78

5.3 Competitive Pricing Strategies 1805.3.1 Marginal pricing 1815.3.2 Non-marginal pricing 195

5.4 Non-competitive (Collusive) Pricing Strategies 1975.4.1 Cartel .'v 1975.4.2 Price leadership 198

5.5 Hedonic Modelling to Inform Strategic Pricing . . . 2005.6 Conclusions and Policy 206

Distinguishing the Economic c'bntrlbiitlon, EcrafflmsiB Dmpacfis a r t ie8Benefits of Tourism 2116 Tourism's Economic Contribution, Economic Impacts and Net

Benefits 2136.1 Introduction 2136.2 The Economic Contribution of Tourism 2136.3 The Economic Impacts of Tourism 216

6.3.1 Direct effects 2176.3.2 Indirect effects 2186.3.3 Induced effects 2186.3.4 Leakages 219

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CONTENTS

6.4 The Costs and Benefits of Tourism 2216.4.1 Economic impacts are not benefits 2226.4.2 Importance for policy 223

6.5 Sources of Costs and Benefits 2246.5.1 Terms of trade effects 2256.5.2 Taxation, government revenue and subsidies 2266.5.3 Market power 2276.5.4 Underemployment 2286.5.5 Foreign exchange effect - 2296.5.6 Externalities 229

6.6 Economy-Wide Effects on Net Benefits 2326.7 Conclusions and Policy 233

Measuring Tourism's Economic Contribution, Impacts a id Net Benefits 237

7 The Economic Contribution of Tourism:Tourism Satellite Accounts 2397.1 Introduction 239

7.2 What is a TSA? 2417.3 The Importance of TSA ; . . 246

7.3.1 TSA identify'tourism'and'tourist' 2467.3.2 TSA identify a tourism'industry' 2487.3.3 TSA measure the key economic variables 2527.3.4 TSA measure tourism's interrelationship with other

industries 2547.3.5 TSA support inter-industry comparisons 2547.3.6 TSA support international comparisons 255

7.3.7 TSA give 'credibility' to estimates of the economiccontribution of tourism 255

7.3.8 TSA provide a tool for tourism research and policy analysis . . . . 2557.4 Updating TSA 2567.5 RegionalTSA 2587.6 TSA as a Policy Instrument •. 265

7.6.1 Direct versus indirect economic contribution of tourism 2657.6.2 Economic contribution versus economic impact 266

7.7 Using TSA: Developing Measures of Tourism Performance 267

7.7.1 Tourism yield 2677.7.2 Tourism productivity 2757.7.3 Calculating the carbon footprint of tourism 277

7.8 Conclusions and Policy 279

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CONTENTS

8 Economic Impacts of Tourism Using Input—Output Models 2828.1 Introduction 2828.2 Purpose of Economic Impact Analysis 2838.3 The Tourism 'Multiplier' 284

8.3.1 Keynesian multipliers 2868.3.2 Multipliers based on economic modelling 287

8.4 Multipliers Based on I - O Models 2888.4.1 Structure of an I -O table 2888.4.2 The direct requirements matrix '•.._. ^ 2928.4.3 Types of I -O multipliers 2938.4.4 Disaggregating I -O multiplier effects 2948.4.5 SAM multipliers 2968.4.6 Static versus dynamic I—O models 2998.4.7 Use of I—O multipliers in tourism economic impact studies 299

8.5 Limitations of Tourism I -O Multipliers 3008.5.1 Restrictive assumptions 301

8.6 How Tourism Multipliers are Misused 3098.6.1 Using 'inappropriate' multipliers 3108.6.2 Failure to recognise expenditure diversion 3108.6.3 'Induced income'multipliers 310

8.6.4 Misuse of'ratio' multipliers 3118.6.5 Using an inappropriate model 311

8.7 Conclusions and Policy 312

9 Economic Impacts of Tourism: CGE Modelling 3169.1 Introduction 316

9.2 The Structure of a CGE Model 3179.2.1 The 'Nottingham' CGE model 3199.2.2 Static versus dynamic general equilibrium models 327

9.3 Economic Impact Assessment Using CGE Models 3289.3.1 Increased tourism to Australia 3299.3.2 Increased tourism to Fiji 3339.3.3 Reduced tourism to Hawaii 3369.3.4 Effects of foot and mouth disease on UK tourism 3399.3.5 CGE measures of tourism yield 3429.3.6 Policy responses to the impact of 9/11 on US tourism 3459.3.7 Tourism and poverty reduction in Brazil 3519.3.8 Is an expansion of tourism good for the poor in Thailand? 356

9.4 Strengths and Limitations of CGE Modelling 3599.5 Conclusions and Policy 362

IX

CONTENTS

10 Cost-Benefit Analysis 36510.1 Introduction 36510.2 CBA 36710.3 When to Use CBA 368

10.3.1 Analysing capital expenditure 36810.3.2 Analysing a policy option 36910.3.3 Retaining or disposing of an existing asset 36910.3.4 Post evaluation of a project or program 369

10.4 Eight Main Steps in Performing CBA 37210.4.1 Determine the scope and objectives of the analysis 37210.4.2 Consider the alternatives 37210.4.3 Identify the impacts 37310.4.4 Value the relevant costs and benefits 37310.4.5 Discount the future costs and benefits 37710.4.6 Apply decision rules 37810.4.7 Sensitivity analysis 38310.4.8 Post-implementation review 389

10.5 Other Issues in Conducting a CBA 39210.5.1 Shadow prices 39210.5.2 Double counting 39410.5.3 Income distributional effects 395

10.6 Cost-Effectiveness Analysis 40010.7 Policy and Conclusions 402

11 Economic Evaluation of Special Events 40511.1 Introduction .• 40511.2 The Logic of Government Support for Special Events 40711.3 Estimating Event-Related'New'Expenditure 409

11.3.1 Setting the boundaries of the host region for the event 40911.3.2 'New' expenditure 411

11.4 The Economic Impact of an Event 41811.5 Challenges to Best Practice Event Assessment 419

11.5.1 Failure to correctly estimate 'new' event-relatedexpenditure 419

11.5.2 Uncritical use of I—O models to estimate economicimpacts of events 420

11.5.3 Uncritical use of sales (output and transactions) multipliers 42411.5.4 Relevance of the labour market 42511.5.5 Relevance of the jurisdiction 42611.5.6 Treatment of construction expenditure 426

CONTENTS

11.5.7 Treatment of taxes 42811.5.8 Event subsidies 429

11.6 Estimating the Economic Impacts of Events Using CGE

Models 43011.6.1 Do event size and location matter? 43311.6.2 A practical solution: Focus on inscope expenditure 435

11.7 CBA of Events 43611.7.1 The economic impacts of an event are not its'benefits' 43811.7.2 CBA of special events: Three case studies 439

11.8 Improving Event Evaluation 45211.9 Conclusions and Policy 453

Tourism Investment 45712 Investment by Tourism Firms 459

12.1 Introduction 45912.2 Categories of Tourism Investment 46012.3 Sources of Capital Investment Financing 462

12.4 Generating Capital Investment Proposals 46412.5 The Optimal Level of Investment •. 464

12.5.1 The rate of interest ' 46612.6 Selecting Capital Investment Projects 467

12.6.1 Estimating cash flows for the project proposals 46712.6.2 Discounting 46812.6.3 The accept—reject decision 46912.6.4 Reviewing investment projects after implementation 47312.6.5 Common pitfalls for tourism firms to avoid in capital '

budgeting 475

12.7 Challenges Facing Tourism Investment 47612.8 Conclusions and Policy 486

13 Investing in Tourism Infrastructure 48913.1 Introduction 48913.2 Public Infrastructure Investment for Economic Development 49213.3 Infrastructure Provision: The New Model 494

13.3.1 Public-private partnerships 49513.3.2 Userpays 497

13.4 The Congestion Problem in Tourism Infrastructure 49713.5 Regulating Tourism Infrastructure 503

13.6 Environmental Constraints and Trade-Offs 50513.7 Infrastructure and Tourism Growth: Necessary but not Sufficient 506

XI

CONTENTS

13.8 Tourism Infrastructure in Developing Countries 50713.9 Conclusions and Policy 508

14 Foreign Direct Investment 51114.1 Introduction 51114.2 Patterns of FDI in Tourism 51214.3 Motives for FDI in Tourism 514

14.3.1 Ownership advantages 51414.3.2 Location-specific advantages 51514.3.3 Market internalisation advantages 516

14.4 Effects of FDI on Host Destination 51614.5 Potential Benefits of FDI to Host Destination 517

14.5.1 Provision of capital 51714.5.2 Marketing and destination promotion effects 519

- 14.5.3 Product and quality effects 52014.5.4 Increased inbound tourism creating income and jobs 52014.5.5 Technology transfer 521

14.6 Potential Costs of FDI to Host Destination 52114.6.1 Crowding out of domestic investment 52114.6.2 Greater'leakages'from tourism imports 52214.6.3 Repatriation of profits 52414.6.4 Employment effects 52514.6.5 Loss of equity and control 52614.6.6 Inappropriate form and scale of tourism development 527

14.7 Domestic Ownership versus Foreign Ownership 53114.7.1 Is it better for tourism projects to be domestically

owned rather than foreign owned? 53114.8 Conclusions and Policy Implications 533

Taxation and Tourism 53715 Tourism Taxation 539

15.1 Introduction 53915.2 Types of Tourism Taxation 54115.3 Effects of Taxation 541

15.3.1 Excess burden 54115.3.2 Tax incidence 545

15.4 Principles of Good Taxation 55215.4.1 Equity (Fairness) 55215.4.2 Efficiency 55315.4.3 Effective administration 554

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CONTENTS

15.5 Arguments for Taxing Tourism 55715.5.1 Provision of public investment 55815.5.2 Expansion and diversification of the tax base 559

15.5.3 Tax base erosion 559

15.5.4 Exporting taxes to non-residents 55915.5.5 Taxes to correct for environmental externalities 56115.5.6 Taxes to promote tourism destinations 563

15.6 Arguments against Tourism Taxation 56415.6.1 Contraction of economic activity 56515.6.2 Retaliation 568

15.7 Earmarking of Specific Tourism Taxes 57315.8 Conclusions and Policy 577

Tourism and Aviation 581

16 Aviation and Tourism 58316.1 Introduction 58316.2 Aviation and Tourism - the Policy Conflicts 58416.3 Aviation Technology and Its Economic Consequences 588

16.3.1 Cost structures 58816.3.2 Utilisation and pricing 590

16.3.3 Booking systems 59116.3.4 New aircraft types 59116.3.5 The LCC phenomenon 592

16.4 Airline Liberalisation and Tourism Growth 59616.4.1 The charter market .' . . . 59616.4.2 Domestic de-regulation 60116.4.3 Liberalisation on long-haul markets 602

16.5 Airport Capacity and Patterns of Tourism 60716.6 Taxing Tourism and Aviation 61516.7 Aviation and Tourism: Supply-Side Integration 616

16.8 Aviation Alliances 61716.9 Conclusions and Policy 623

Tourism and the Environment 627

17 Valuing the Environmental Impacts of Tourism 62917.1 Introduction 62917.2 The Potential Impacts of Tourism on the

Environment 630

Xlll

CONTENTS

17.3 Market Failure 63217.3.1 Lack of property rights to the environment 63417.3.2 The public good aspect of environmental resources 63417.3.3 Optimal quantity of a public good 63617.3.4 Externalities 638

17.4 Environmental Preservation versus Development 64117.5 Valuing the Impacts of Tourism on the Environment:

Total Economic Value 64217.5.1 Use value 64317.5.2 Non-Use value 643

17.6 Estimating the Non-Use Value of Environmental Amenities 64617.6.1 Stated preference 64617.6.2 Revealed preference 65417.6.3 Imputed valuation 671

17.7 Conclusions and Policy 673

18 Economic Instruments and Environmental Protection in Tourism 67718.1 Introduction 67718.2 The Optimal Level of Pollution ., . . 67818.3 Insights from Economic Theory 68018.4 Strategies for Pollution Control 681

18.4.1 Voluntary agreements 68118.4.2 The bargaining solution 68218.4.3 Merger 68518.4.4 Direct controls 68518.4.5 Subsidies ' 68818.4.6 Tax on output 68918.4.7 Tax on emissions 69118.4.8 A market for pollution rights 69318.4.9 Other instruments of environmental protection 696

18.5 Assessing Economic Instruments to Protect the Environment 69818.5.1 Uncertainty 69818.5.2 Boundary problems 70018.5.3 Transactions costs 70318.5.4 Public goods 703

18.6 Conclusions and Policy 704

19 Climate Change and Tourism 70719.1 Introduction 70719.2 Climate Change and Tourism: A Two-Way Interaction 709

xiv

CONTENTS

19.3 Climate Change Impacts on Tourism 71019.4 Adaptation Policies for Tourism 71519.5 Tourism Impacts on Climate Change 719

19.5.1 Measuring tourism's carbon footprint 71919.5.2 Tourism's global carbon footprint 72119.5.3 The carbon footprint of a destination 72219.5.4 Carbon footprint of different tourism markets 72319.5.5 Tourism's carbon footprint: Intensity versus impact 726

19.6 Climate Change Mitigation Policies ...-•.._._.. 72719.6.1 Impacts of climate change mitigation policies on tourism

flows 72819.6.2 Market-based instruments 730

19.7 Climate Change and Aviation 74719.8 Conclusions and Policy 749

Destination Competitiveness 755

20 Destination Competitiveness 75720.1 Introduction 75720.2 Factors Underpinning Destination Competitiveness 75920.3 The Travel and Tourism Competitiveness Index 762

20.4 Destination Competitiveness by Niche Market 76620.5 Destination Price Competitiveness 768

20.5.1 Determinants of destination price competitiveness 76820.5.2 Tourism competitiveness and government policy 77020.5.3 Tourism competitiveness and the macroeconomic

environment 77220.6 Different Measures of Destination Price Competitiveness 773

20.6.1 The Consumer Price Index 77320.6.2 Price indexes of tourism bundles 77420.6.3 Package tour prices 77520.6.4 Big Mac Index 77520.6.5 Purchasing Power Parity 77620.6.6 A comprehensive destination price competitiveness

index 77620.6.7 Tourism Trade Weighted Index 78120.6.8 Aviation Trade Weighted Index 785

20.7 Horses for Courses: Which Price CompetitivenessIndicator? 787

20.8 Conclusions and Policy 790

xv

CONTENTS

Future Directions 79321 Future Directions for Research in Tourism Economics 795

Tourism Demand and Forecasting 796Supply and Pricing 798Economic Contribution and Economic Impacts 800Costs and Benefits 803Investment and Infrastructure 804Taxation 806Transport ; 807Environment 808Destination Competitiveness 810

References 812

About the authors 841Index 843

xvi