How Countries Use Price Elasticity to Shape Tourism
The 2023 holiday season has come to a close — for some people, this time marked the start of exciting travel to reunite with loved ones, explore new places, or simply unwind!
Some people chose to escape the cold in North America or Europe and travel to beach destinations like Miami, the Bahamas, Goa, or even Bali, while others opt for the more adventurous vacations and travel to places like Aspen for skiing, or Peru for hiking. For many of these regions, earnings from tourism generate employment and contribute very significantly to the local economy. For example, tourism and related services contribute to about 60–70% of income for Bali and the Bahamas, and drive more than half of local employment.
Many of these tourist hotspots are located in ecologically or culturally sensitive zones, and modern mass tourism can have very detrimental effects on the ecological balance and local cultures of these areas. To avoid this, governments use the price elasticity of demand to shape and control the tourism industries of these vulnerable places.
Tourist footfalls vary significantly across destinations — from the Bahamas, which hosts 7.2 million visitors a year (around 18x the local population of 0.4 million), to Tanzania, which hosts 3.5 million visitors annually (around 0.2x of the local population of 65 million). Several factors impact total tourist footfalls, including accessibility and distance from North America, Western Europe, and North Asia where most tourists come from. However, smart tourism regulators can and do use the price elasticity of demand to their advantage, by regulating the type and number of tourists. This allows them to largely capture the positive economic impact from tourism, while limiting the potential negative impact, by regulating the type and number of tourists.
The price elasticity of demand measures the change in demand in response to changes in price, and in the context of travel, it helps countries and regions assess how tourists will react to fluctuations in vacation costs. Some places prioritize high-end, luxury tourism, while others focus on promoting more affordable options. The decision to cater more towards one or the other is often influenced by economic, environmental, and cultural factors, and the countries of Tanzania and Bhutan are great examples of this.
For a family of 4, the average cost of a 7-day safari tour in Tanzania (including local flights, accommodations, and the safari tour itself) would be around $15,000 USD before fees. On top of this, the government-run Tanzania National Parks Authority has implemented entry fees that range from $100 -150 per person per day for popular national parks, such as the Serengeti National Park and the Ngorongoro Crater Park. As a result of these fees, the total cost of a vacation is 30–40% higher than it would have been, had the tourist economy been subjected only to the 18% VAT (value-added tax) rate applicable to all goods and services in the local economy. As a result, aggregate revenue from tourism or income for the local economy (partially through the Tanzania National Parks budget) remains high. For the most part, the country caters to more affluent tourists and the steep costs that come along with Tanzanian safaris shrink the tourism pool of potential tourists who can afford travel significantly. This shuts out college students and backpackers, preventing over-tourism and the destruction of these national parks’ delicate ecosystems.
In a similar effort to regulate tourism, Bhutan has taken a unique approach by implementing a “low-volume, high-yield” policy. Tourists visiting Bhutan are required to spend a minimum of $100 (previously $200) each day and this mandatory fee covers costs like accommodations, meals, transportation, and the country’s sustainable development fee. Like in Tanzania, Bhutan’s pricing strategy successfully regulates the number of visitors while keeping aggregate revenue relatively stable. The result is that the demographic of the average tourist visiting Bhutan is distinctly different from neighboring Nepal which attracts casual hikers and backpackers (in addition to serious mountaineers). Additionally, part of the money goes towards protecting the country’s breathtaking landscape and preserving and enriching the distinctive Bhutanese culture. Bhutan has tested different minimum daily spending requirements for tourists to strike a balance between generating revenue and controlling the influx of tourists. This demonstrates a unique application of the price elasticity of demand.
At the opposite end of the spectrum, tourist authorities in the Bahamas have chosen to build extensive infrastructure for cruise ships, and host millions of tourists who spend an average of just over $100 a day in the country. Other than different prices for local taxis, there are very few taxes levied specifically on expenditure by tourists. As a result, Nassau / Providence Island in the Bahamas are among the most popular destinations among budget cruise tourists from North America and Europe.
By making conscious choices about taxes / fees that drive per capita tourism costs, countries can find the right balance between making economic gains and using their natural and cultural resources sustainably. In doing so, over-tourism and the destruction of natural habitats can be prevented in order to ensure that the tourism industry aligns with a country’s long-term goals of environmental and cultural preservation.
Just some food for thought as you start planning your next holiday destination!
Sources:
https://ellamckendrick.com/tanzania-safari-cost/
https://www.investopedia.com/terms/p/priceelasticity.asp
