Pigouvian Taxation in Tourism

The paper studies the characteristics and the effects of a tax imposed by a local government on the land used to create new tourists’ accommodations. First, a dynamic policy game between a monopolist in a tourist area and a local government is considered. In each period the former has to decide the size of land undergoing development, whereas the latter has to choose the tax to levy on each newly developed area unit. Linear Perfect Markov strategies are derived for both the noncooperative and the public monopoly case. In equilibrium, a public monopoly would develop land more rapidly than a private monopoly. Furthermore, the more the monopolist discounts the future, the more the long run use of the natural resource is reduced. Second, the properties of the tax are studied considering an oligopolistic market structure. The tax alone does not lead to the socially optimal level of land use. However, its combined effect with another policy instrument such as a quota, induces the optimal level of resource use.