Quality standards versus taxation in a dynamic environmental model of a tourism economy

The increasing economic importance of tourism activity stimulates research on the more adequate instruments to reach tourism policy targets. This paper concentrates on two tourism policy areas, namely the influence on the pattern of tourism specialization and the correction of environmental externalities, and two policy tools, that is, a tourism tax and an accommodation quality standard. Using a dynamic general equilibrium model for an economy specialized in tourism, we show that both instruments are effective in reaching those targets, although they differ in efficiency terms. The quality standard policy regime yields a more efficient tax system, as it makes Ricardian rents bear a higher share of the tax burden, but the quality standard is in itself distortionary and can create incentives for capital over-accumulation. Looking at the steady state, the quality standard allows for higher long run welfare than the tourism tax, provided that the former does not cause any dynamic inefficiency. More generally, the paper shows that a general equilibrium perspective can unveil possible unexpected complementarities between environmental and other policy targets and instruments as, in this case, quality standards aimed to influence the pattern of tourism specialization.