Monday 21 March 2022

Paying for tourism

New Zealand's likely to be getting tourists again this year with the border re-opening. Not a bad time to revisit the idea of running proper access fees at congested venues. 

I'd noted it here last year, after I gave a talk on this stuff at Otago University's Tourism Policy conference in Queenstown. 

I'd had to dig up my old notes from that talk for another purpose and realised I'd never put them up anywhere else. 

So I'll paste them here. 

I never deliver the talk I write down ahead of these things; I always ad lib. But the notes give a decent idea of what I likely covered. I'd sent this version through to the organisers ahead of time. 

Net Benefit Tourism: Covering the Costs

Address by Dr Eric Crampton, Chief Economist, The New Zealand Initiative, to the Otago Tourism Policy School 2021.

[Or, rather, notes for such an address – check against delivery. My talk will be on the themes here developed, but I don’t memorise or read speeches.]

Imagine for a moment that the grocery store here in Queenstown ran on the same principles that underpin New Zealand’s tourism framework.

We would have substantial government-funded advertising regimes encouraging people to get out to the grocery store, noting the fabulous products that could be on offer.

People would have to pay their own way to get to Queenstown, and to get from the airport to the store.

But when they would get to the store, half of the aisles would be an utter disaster. The products in those aisles would all be priced at zero dollars. Customers would be queued for glimpses of the products, and the aisle itself would be rather run-down. Products in other aisles would be priced normally, but the congestion and mess resulting from the freebie aisles would make the whole place just a little tawdry.

It’s pretty easy to imagine how people would react to having to shop at that store. They’d want government to step in to limit the number of people who might shop there. They’d want tough measures to make sure that locals who needed to shop there weren’t crowded out by other visitors coming in for all the free products. And nobody would be happy. We would have conferences on how we might ensure that grocery customers pay their way, and figuring out rationing mechanisms for the products in those messy aisles.

When we put it that way, the problem is pretty obvious.

Until the past couple of decades, getting to New Zealand was expensive enough relative to incomes that congestion really could not be much of an issue. When there aren’t many visitors, figuring out how to charge for access to parks, or how to cover the infrastructure costs of tourism in places like Fox Glacier, didn’t really come up.

There is no point in setting up property rights or pricing mechanisms for things that are in infinite supply relative to demand. Students of economic history and the history of economic institutions will know Harold Demsetz’s 1967 work that described the evolution of property rights regimes among the North American First Nations. Prior to Europeans’ arrival in what is now Quebec, beavers were hardly scarce; their meat was of little value, and locals requirements for furs were small. So no hunter much impeded on other hunters’ ability to get on with things. After the arrival of Europeans with insatiable appetites for beaver furs, property rights in trapping grounds were established and enforced. Establishing and enforcing those rights is hardly free. But it became worth the effort when demand conditions changed.

In 1990, New Zealand accommodated just under a million visitor arrivals. In 2000, 1.8m. 2010: 2.5m. 2019: 3.9m. Central government collected about $1.8 billion in GST from those visitors in 2019. In recognition of the costs that large numbers of visitors can impose on specific communities, the government provides a $25 million annual fund for infrastructure projects in tourist-facing places.

When the number of visitors quadruples, the country starts needing better ways of managing access to things that are scarce. Some things that had been free to access might just need an access fee. And there are ways of doing it that improve outcomes for locals, rather than making things worse.

I hope that New Zealand’s vaccination programme proceeds at a fast pace and that the country can reopen to travel in the near future. Getting some better mechanisms in place to cover the costs, though, would put the industry on more sustainable footing.

Currently international travel is not covered by the emissions trading scheme; there has not yet been international consensus on how to divvy up carbon charges between countries. That has led to arguments that travel should be restricted to reduce international aviation emissions. But another way of thinking about it is that the carbon emissions in a ticket from London to Auckland would cost about $50 if they were covered by New Zealand’s ETS. Does it make more sense to try to centrally plan visitor numbers, or does it make more sense to find ways of adding a $50 carbon charge to a ticket? International agreement is best, but it isn’t hard to imagine putting international aviation fuel into the ETS - Increasing New Zealand’s net emissions cap commensurately, but maintaining the same path to net zero. If someone then decides that travel isn’t worth the cost, where the cost includes the carbon charge, isn’t that a better way of sorting out which travel might really not be worthwhile?

Once travelers get here, they face a lot of parks and attractions that carry no charge but that are under substantially increased pressure.

I grew up in Canada. There, if you want to visit the national parks, you have to buy a national parks pass. The annual pass doesn’t cost that much, and is a rather good bargain for locals would use it year-round, but amounts to a very high per-visit fee for foreign tourists. The government could run a similar system here, but with explicitly much higher charges for foreign visitors than for locals, and use the collected revenues to improve the facilities for everyone.

For other facilities, the Department of Conservation could auction concession rights under a restriction that access by locals has to be at very reduced fees. Again, those kinds of systems would help fund far better services in congested places, with better services for locals being funded by visitors. When visitor numbers are small, it wouldn’t be worth it. But it can make a lot of sense in places where visitor numbers are higher.

Local councils face high costs in trying to build and maintain infrastructure necessary for dealing with surges in tourist numbers on small tax bases. That has driven demand for measures like bed taxes in places like Queenstown. But that doesn’t really solve the problem. Plenty of places without beds to tax face similar problems: Fox and Milford, for example. Bed taxes would never cover the costs in those places.

And bed taxes come with their own substantial risks. Imagine that every town set its own bed taxes. Imagine further that a tourist couple, who would entirely be covering their own costs if the GST they paid were considered, get a thousand dollars in value from a driving tour across the country. Is it that hard to imagine successions of bed taxes that wind up charging more than the value the couple gets from the whole trip?

This is actually a known problem in economics, and I’ll turn again to economic history. In the 1250s, ships traveling the length of the Rhine River had to stop at 12 toll stations along the course of the river, but a lot of informal toll-stations were set up by robber barons along the way too. Each site wound up charging far higher fees than would have been optimal, effectively trying to extract the entire value of a trip at each point along the trip. And, of course, this hold-up problem resulted in far too little travel, hurting all the cities along the way, and the League of Rhine Cities wound up laying siege to some of the robber-baron castles. Having one price for the whole trip, rather than having each segment of the trip extracting high and uncoordinated fees, can make more sense.

And surely where tourists are contributing on the order of $1.8 billion a year already in GST, it makes more sense for central government to use that revenue to defray the costs that tourists impose in different parts of the country. The Tourism Infrastructure Fund seems only a drop in the bucket.

I tend not to write conclusions for these in advance but sum up instead based on the vibe of the rest of the conference. So forgive its dropping off abruptly. 

I've vague memories of a bed-tax-proposing Mayor insisting he wasn't a robber baron though. 

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