The efficiency of government promotion of the tourism industry

As promotion of tourism changes preferences, and hence the utility function, the usual comparative static analysis is not appropriate. A comparison of utility levels with, and without, promotion has to be conducted with the same utility function. The choice of the utility function depends on whether the promotion provides any utilityenhancing information or simply induces consumption switching (from non-tourism goods to tourism goods). With a series of simulations, it is shown that in the case of information enhancement, tax funded promotion of tourism may be efficient. In addition, it may also overcome the inefficiency associated with imperfect competition if the tourism industry produces under a higher degree of increasing returns than the non-tourism industry. If the reverse is true, and in the absence of information enhancement, promotion of tourism will reduce social welfare in accordance to the original preference.