The efficiency of government promotion of the tourism industry — with special reference to Australia

The promotion of tourism by government is an effective way of attracting more tourists. As such promotion involves reallocation of resources, it will affect the rest of the economy. In this thesis, I explore the much neglected implications of increasing returns to analyze the welfare effects of the promotion of tourism. This thesis includes three major parts. I start the analysis in a closed economy setting in Chapter 2. As promotion of tourism changes preferences, and hence the utility function, a general comparative static analysis is not appropriate. A comparison of utility levels with, and without, promotion has to be conducted with the same utility function. The choice of the utility function depends on whether the promotion provides any utility enhancing information or simply induces consumption switching (from non-tourism goods to tourism goods). With a series of simulations, I show that in the case of information enhancement, tax funded promotion of tourism may be efficient. In addition, it may also overcome the inefficiency associated with imperfect competition if the tourism industry produces under a higher degree of increasing returns than the nontourism industry. If the reverse is true, and in the absence of information enhancement, promotion of tourism will reduce social welfare measured with original preferences. In Chapter 3, I extend the analysis to an open economy setting. A model of monopolistic competition combined with international trade is developed. With free trade between two countries, promotion is more effective in bringing profits for tourism firms in the short run. Despite the fact that the domestic non-tourism firms face more competition from foreign firms, a similar result to the case of a closed economy is obtained. The likely big increase in profits of non-perfectly competitive firms associated with tourism, following promotion, sustains the pressure for promotion, but the dissipation of profits in the long run renders promotion inefficient. Given the results obtained in Chapters 2 and 3, an empirical study with Australian data is presented in Chapter 4. The objective of the study is to test for the existence of increasing returns in the Australian tourism industry. The regression results show that there is no evidence for a higher degree of increasing returns in the tourism-related sectors than non-tourism sectors. This result suggests that it is not efficient to introduce tax-funded promotion of the tourism industry, as the costs of promotion will likely exceed the benefits.