Abstract
Introduction
The model
Comparative statics: supply side analysis
Total efect of the environmental regulationConclusions
Appendices
Appendix B. Shape of the production possibility curve
Appendix C. Properties of the revenue function
Appendix D. Numerical simulations
Appendix E. The case where the production function of tourism sector is Cobb–Douglas
References
Abstract
This study presents a general equilibrium model of a small open developing economy with pollution generated by the tourism industry. The national government issues emission permits and constructs tourism infrastructure for the tourism sector. We examine the efects of a stricter environmental regulation on welfare, production, and income distribution. If the elasticity of substitution in the tourism sector is sufciently low, a stricter environmental regulation paradoxically expands the tourism sector and narrows domestic wage inequality, even under constant tourism terms of trade. In this model, in addition to the two traditional channels, there is a new channel through which a stricter environmental regulation afects the tourism terms of trade and domestic welfare. The new channel, which arises from the diference between the marginal value product of tourism infrastructure and its price, improves the tourism terms of trade and domestic welfare if (1) the marginal value product of tourism infrastructure is greater than its price, (2) the output of tourism infrastructure is increased by a stricter environmental regulation, and (3) the excess supply of a tourism service decreases with a stricter environmental regulation.
Introduction
The tourism industry has become an important sector for both developed and developing countries as it creates employment opportunities and attracts foreign currency. The tourism sector requires a large amount of investment, for example, water supply, sewerage systems, ports, airports, parks, highways, and tourism promotion by authorities (e.g., Visit Japan, Incredible India, and Malaysia Truly Asia), which is rather difcult to be fnanced only by the private sector. Therefore, a national government needs to construct public infrastructure for the tourism industry, hereafter referred to as tourism infrastructure. At the same time, the tourism sector causes environmental damage. For example, the concentration of people degrades the water quality in the local community, and trafc congestion pollutes the air by the emission of fumes.1,2 To mitigate these negative efects, the government introduces an environmental regulation by issuing emission permits to control the amount of pollution.