Coping with Externalities in Tourism - A Dynamic Optimal Taxation Approach

Schubert, Stefan Franz (2009): Coping with Externalities in Tourism - A Dynamic Optimal Taxation Approach.

Abstract

The paper studies optimal taxation (subvention) when tourism is associated with „multiple externalities“, using a simple dynamic model of a small open economy, which is completely specialized in the production of tourism services and populated by a large number of intertemporally optimizing agents. Depending on the volume of tourism production, the externality can be either positive or negative. We show that the first best optimum, achieved by a central planner, recognizing the externality, can be replicated in a decentralized economy by using a time-varying tax rate. This ensures that (i) the steady state of the first best optimum is reached and that (ii) the speed of convergence to steady state is socially optimal.

• Item Type: MPRA Paper
• Language: English
• Keywords: tourism demand; externalities; dynamic optimal taxation
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R13 - General Equilibrium and Welfare Economic Analysis of Regional Economies; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities ; Redistributive Effects ; Environmental Taxes and Subsidies

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