Sustainable tourism development: A dynamic model incorporating resident spillovers

The ongoing debate on over-tourism shows that developing more sustainable forms of tourism is not only relevant for environmental reasons but it would also create important spillovers benefitting residents within the economic and social domain of sustainability. Based on this broad idea, we develop a theoretical model of sustainable tourism considering the well-being of locals incorporating external effects and trade-offs with less sustainable forms of tourism. We employ a dynamic model of resident well-being, where utility is derived from consumption, tourism quality (e.g. better restaurants, hiking trails), and the number of tourists visiting. A benevolent regional government maximizes the representative resident’s well-being by choosing the rate of consumption, the number of tourists visiting (e.g. number of beds), and the rate of investment in tourism quality. Our results depend crucially on the initial number of tourists and state of tourism quality. Suppose the initial state of tourism quality is below its long-run optimum. If initial visitor numbers are small so that increasing them raises residents’ well-being directly through consumption (i.e. more tourism supply and cultural exchange raises resident’s marginal utility of consumption), the optimal strategy is to invest in tourism quality and to increase the number of tourists over time, as quality changes. If initial visitor numbers are large, increasing them further reduces the resident’s marginal utility from consumption (e.g. booked-out restaurants, crowed hiking trails, etc.) and the optimal strategy is to increase tourism quality over time but to reduce the quantity of visitors. Our general finding is that quantity and quality may move in tandem or in opposite direction, depending on current state and residents’ preferences. If over-tourism means that residents’ well-being is negatively affected by an increasing number of visitors, the model suggests that ongoing investment in tourism quality while reducing numbers will maximize residents’ well-being. We show that the first-best optimum, achieved in a centrally planned economy, can be replicated in a decentralized economy by using time-varying tax rates. This ensures that (i) the steady state of the first-best optimum is reached and that (ii) the speed of convergence to steady state is socially optimal.