An analysis of tourists' consumption of non-traded goods and services on the welfare of the domestic consumers

Abstract

This paper provides a formal analysis of the consequences of tourists' consumption of the non-traded goods and services on the domestic economy of the country receiving the tourists. A major difference in a local resident's consumption of the non-traded goods and services and the tourist's is that the latter's consumption converts part of the non-traded goods and services into an exportable. However, these non-traded goods and services are not an exportable in the traditional sense of the term. In consuming the product, it is the consumer that moves rather than the product. As the price is determined in the tourist- receiving country by forces of foreign demand, local demand and supply, there is the element of monopoly power in price determination. We obtain several interesting results from our investigation. First, it is shown how the consumption of non-traded goods and services affects the domestic consumption possibility locus. Second, it is shown how this change in the consumption possibility locus may reduce the welfare of the local residents. Finally, it is shown how an increase in the foreign demand for non-traded goods and services may lower welfare. These results are a consequence of monopoly power in the trade of non-traded goods and services.