Discuss the measures a government can implement to improve resource allocation in the market for tourism services.

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(b) Discuss the measures a government can implement to improve resource allocation in the market for tourism services. [15]

VJC 2024

The presence of negative externalities, such as pollution and resource depletion, means that the market for tourism fails to account for the full societal costs, resulting in overconsumption and long-term ecological damage. To correct this market failure, governments can implement a range of measures to improve resource allocation in the tourism sector such as taxes and legislation

Taxes

One measure that the government can adopt is the imposition of taxes on tourism-related activities. The rationale behind such a tax is to make consumers bear the external costs of their consumption, thereby internalising the negative externalities associated with tourism. Specifically, the government can impose a tax equal to the value of the marginal external cost (MEC), which represents the third-party costs such as environmental degradation and pollution. By imposing a tax on tourism, the marginal private cost (MPC) curve will shift to the left, aligning with the marginal social cost (MSC) curve. This ensures that consumers face higher prices, reflecting the true cost of their consumption to society, and thus, tourism will occur at a socially optimal level, where MSC equals the marginal social benefit (MSB).

However, determining the exact value of the MEC can be challenging. Governments often lack full information about the precise environmental damage caused by different tourism activities, making it difficult to set an accurate tax rate. It is not easy to put a monetary value on the negative externalities generated by tourism, such as air pollution or water shortages. For example, pollution from tourist boats may affect marine ecosystems in ways that are difficult to quantify. Moreover, different tourism activities generate varying levels of negative externalities. For instance, eco-tourism might have positive externalities, such as the preservation of natural habitats, rather than negative ones. Therefore, a blanket tax on all tourism activities would be inefficient, as it would penalise activities that actually contribute to environmental sustainability. This highlights the complexity in designing an effective taxation policy that balances the need to reduce negative externalities without discouraging activities that generate positive externalities.

Legislation

Another measure that governments can use to address the inefficiencies caused by excessive tourism is legislation. Governments can enact laws to regulate tourism activities, aiming to reduce the environmental harm caused by overtourism. For example, in 2019, the city of Venice in Italy introduced regulations to limit the number of cruise ships entering the city’s port due to concerns over air pollution and damage to historical landmarks. This type of legislation directly limits harmful activities and provides a clear framework for protecting the environment.

However, legislation can be difficult to enforce. Ensuring compliance with environmental regulations often requires extensive monitoring and enforcement mechanisms, which can be costly for governments. For instance, monitoring air and water pollution levels in tourist destinations may require specialised equipment and personnel, adding to administrative costs. Furthermore, enforcement can be challenging, especially in large or remote areas where tourism activities are dispersed. There may also be resistance from businesses and tourists, who might view the regulations as too restrictive. Additionally, tourism plays a significant role in many economies, so governments may face political pressure from the tourism industry to avoid strict regulations that could reduce tourist inflows.

Conclusion

In conclusion, governments have several tools at their disposal to improve resource allocation in the tourism sector, including taxation and legislation. Taxes can be an effective way to internalise the negative externalities of tourism, but they are difficult to implement precisely due to challenges in valuing external costs and the risk of blanket taxes that do not account for positive externalities. Legislation can directly limit harmful tourism activities, but enforcement is costly and difficult, requiring ongoing monitoring and compliance efforts. To address the inefficiencies caused by excessive tourism, governments may need to adopt a combination of these measures, along with promoting sustainable tourism practices, to achieve a more balanced and efficient allocation of resources.