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Dynamic Effects of Subsidizing the Tourism Sector

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  • Stefan F. Schubert
  • Juan Gabriel Brida

Abstract

This paper studies the short-run and long-run effects of a production subsidy to the tourism sector of a small open economy, which can also be thought of as a region within a country. The authors introduce a two-sector dynamic general equilibrium model in which the tourism sector is considered to be labour-intensive and produces traded services. The other sector is capital-intensive and produces a non-traded good, which is also used for capital accumulation. Labour and capital can move freely between sectors. Economic decisions are made by forward-looking representative agents which optimize their intertemporal welfare by choosing consumption of both the non-traded good and tourism services, the sectoral allocation of labour and the rate of wealth accumulation. The authors discuss the short-run, dynamic and long-run effects of a production subsidy to the tourism sector. In the short run, the introduction of a subsidy to tourism production leads to a boom in that sector. As time passes, the economy-wide capital stock is decumulated and production of tourism falls. In the long run, compared to the situation before the subsidy was implemented, tourism production remains on a higher level, whereas output of the non-traded good drops.

Suggested Citation

  • Stefan F. Schubert & Juan Gabriel Brida, 2008. "Dynamic Effects of Subsidizing the Tourism Sector," Tourism Economics, , vol. 14(1), pages 57-80, March.
    • Handle: RePEc:sae:toueco:v:14:y:2008:i:1:p:57-80
    DOI: 10.5367/000000008783554767
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    Citations

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    Cited by:

    1. David Perrain & Philippe Jean-Pierre, 2020. "Tourisme et croissance économique dans les petites économies insulaires : à l'épreuve des modèles à seuil," Working Papers hal-02462562, HAL.
    2. Roberto Gabriele & Enrico Tundis, 2015. "Contesto regionale, struttura economica e impatto delle politiche regionali: il caso degli alberghi in Trentino," SCIENZE REGIONALI, FrancoAngeli Editore, vol. 2015(3 Suppl.), pages 37-59.
    3. Roberto Gabriele, & Enrico Tundis, & Enrico Zaninotto, 2015. "Public Subsidies and Development of Hotel Industry: Evidence from a Place-based Policy," DEM Discussion Papers 2015/10, Department of Economics and Management.
    4. Schubert, Stefan Franz & Brida, Juan Gabriel, 2009. "A Dynamic Model of Economic Growth in a Small Tourism Driven Economy," MPRA Paper 16737, University Library of Munich, Germany.
    5. Roberto Gabriele & Enrico Tundis, 2015. "the effect of longitudinal multiple subsidies on firm performance in the presence of neighbour interactions," ERSA conference papers ersa15p1368, European Regional Science Association.
    6. Stauvermann, Peter Josef & Kumar, Ronald Ravinesh, 2017. "Productivity growth and income in the tourism sector: Role of tourism demand and human capital investment," Tourism Management, Elsevier, vol. 61(C), pages 426-433.
    7. Stefan F. Schubert, 2010. "Coping with Externalities in Tourism: A Dynamic Optimal Taxation Approach," Tourism Economics, , vol. 16(2), pages 321-343, June.
    8. Bernini, Cristina & Pellegrini, Guido, 2013. "Is subsidising tourism firms an effective use of public funds?," Tourism Management, Elsevier, vol. 35(C), pages 156-167.
    9. Juan Gabriel Brida & Silvia London & Mara Rojas, 2013. "A Dynamic Model of Tourism and Economic Growth: the Role of Physical and Human Capital," Economics Bulletin, AccessEcon, vol. 33(2), pages 1361-1373.
    10. Peter Josef Stauvermann & Ronald Ravinesh Kumar, 2017. "Modeling economic growth with tourism for small open economies," Metroeconomica, Wiley Blackwell, vol. 68(4), pages 1001-1018, November.
    11. David Perrain & Philippe Jean-Pierre, 2019. "The smart destination strategy, a key factor for changes in vulnerable tourist destinations? [La stratégie de destination intelligente, facteur clé des mutations des destinations touristiques vulné," Post-Print hal-02144769, HAL.
    12. Leyi Zheng & Junfeng Liu & Qiong Yang & Yuqing Wang & Ying Liu & Xiurong Hu & Jianying Hu & Yi Wan & Xuejun Wang & Jianmin Ma & Xilong Wang & Shu Tao, 2023. "The Impacts of China’s Resident Tourism Subsidy Policy on the Economy and Air Pollution Emissions," Sustainability, MDPI, vol. 15(10), pages 1-16, May.
    13. Stefan F. Schubert, 2016. "A short-run model of a two-sector economy with tourism and unemployment," Tourism Economics, , vol. 22(4), pages 763-778, August.
    14. Stauvermann, Peter Josef & Kumar, Ronald Ravinesh, 2016. "Economics of tourism & growth for small island countries," Tourism Management, Elsevier, vol. 55(C), pages 272-275.

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    More about this item

    Keywords

    dynamic open economy two-sector model; subsidies; deindustrialization;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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