Quality and Congestion in Environmental Goods — The Road to the Wangapeka

An increasing complaint heard among New Zealand residents is that their enjoyment of local environmental resources is being diminished by increased congestion from foreign visitors. This paper considers a model of vertical differentiation in which foreign high-value and domestic low-value consumers incur congestion costs in using a common resource. We demonstrate that reducing quality in the face of increased foreign demand is optimal absent discriminatory prices (but not otherwise). We also consider the provision of multiple environmental goods and demonstrate that providing differential qualities may be optimal even if domestic consumers do not use the high-quality resources at all.