Nova workboard

a blog from young economists at Nova SBE

Public advertising of tourism: Is there a consensus?

A novel matter arrived to the public opinion in Lisbon a few years ago. The question was: should the municipality apply fees to entrance into the city and to overnight stays in hotels, hostels, lodgings and so on?

The idea was that the money collected would serve to finance advertisement expenses the municipality would incur publicizing the city and touristic activities in the region. The fees would range from 0.20€ to 1.90€ for 5 stars hotels. Additionally, 1€ was to be charged to every tourist coming into the city by cruise ship, airplane or train. However, it is somehow controversial if this would in practice benefit related businesses. These ended up not being implemented because people said it would hurt revenues by discouraging tourists from coming here. More recently, the government is thinking about increasing the fees applied to airline companies at Lisbon airport by 7.56% and in Porto by 1.5%.

When firms invest in promotion willingly, they are supposed to do it according to profit maximization objectives. Advertisement may increase sales because it informs consumers about prices and features of the product or it can persuade consumers to buy the product associating it with positive images or by repeating its name. Advertisement does not only increase sales but also prices, therefore, it may raise profits as well. Still, a firm should spend money in advertisement just until its last Euro spent is smaller than the generated increase in profits.

Dorfman-Steiner’s result states that how much a firm should spend in advertisement by unit of sales must be equal to the ratio between the advertisement elasticity of demand and the price elasticity of demand. This means two things: a firm should advertise more when the consumers’ sensibility to advertisement is higher and less when the sensibility to price is higher.

Tourism may be a type of product/service requiring strong advertisement, since it is expensive and it is a so called product of choice, such as cars. But usually the promotion is done by the social media, by private associations and through word of mouth. However, if the government or a municipality starts collecting revenue by forcing hotels to charge more to their clients and then using this revenue to finance advertisement itself, it raises the question of whether this initiative is efficient or not.

In fact, what will happen is that tourism in Portugal will become more expensive in absolute terms and relative to substitute services, like travelling to other countries. Moreover, travelling to Lisbon will be relatively more expensive than travelling to Porto. On top of that, luxurious tourism, like going to a resort, will become relatively more expensive than going to a hostel, for instance.

If the advertisement somehow compensates the loss in revenues resulting from the price increase, the profits are either maintained or raised. However, airport fees and other forthcoming taxes on tourism are not meant to finance advertisement, which means the likely outcome is that the municipality will get more money to pay its debts, while businesses and consumers will get worse off.

Nowadays, economic growth is being driven mostly by tourism and the activities involved, such as air transportation. In 2013, tourism represented around 14.1% of exports, commercial traffic in airport infrastructures increased by 1.5% in landed aircraft and by 4.9% in the movement of passengers (7% if we account only for Lisbon). The city of Lisbon is in 4th place within the Top 10 elected European cities by the tourist guide Fodor’s. Therefore, in my opinion, when tourism is thriving and boosting our economy, maybe taxing the sector is not so much of a good idea, doing it is essentially taking the focus away from our ex libris source of income, which is tourism.

Carolina Conde Rodrigues

# 622

References:

Aeroportos de Portugal (ANA)

Desafios do Turismo em Portugal 2014, Pricewaterhouse Coopers (PwC)

Instituto Nacional de Estatística (INE)

Lisboa discute taxas de entrada e dormida para turistas (22-Sep-2010), Público, available at: http://www.publico.pt/local-porto/jornal/lisboa-discute-taxas-de-entrada-e-dormida–para-turistas-20250307

Observatório, Turismo de Portugal, Ministério da Economia

Advertisements

Author: studentnovasbe

Master student in Nova Sbe

Comments are closed.