Tourism specialization and environmental sustainability in a dynamic economy

This study focuses on the dynamic behaviour of a small open economy specialized in tourism based on natural resources when tourist services are supplied to foreign tourists who are crowding-averse and care for the environment. We analyse the steady-state properties of the model and a unique locally saddle-point equilibrium is found for both the market and the central planner solution. Then we compare the effects of two policies aiming at improving the market solution - in the first the government poses a corective tax on residents income and then redistributes the tax gains with lump-sum transfers while, in the second, the government taxes residents income and employs the tax gains in pollution abatement technology. We find that the first policy is able to direct the economy towards its first-best dynamic path but the second policy, by relaxing the dynamic constraint on the environment, yields a higher steady-state utility when the externality effects and/or the natural regeneration rate of the environmental asset are low enough. Both policies, insofar they lead to an increase in tourists willingness to pay, might work as an implicit tourist tax paid by tourists, with the difference that the first policy always leads to to this result, while the second obtains it only when tourists aversion to crowding is not too high.