Tourism Taxation and Environmental Quality : A Model with Vertical Differentiation of the Accommodation Industry

The growth of the tourism sector in the last years, and in particular of the accommodation industry, has increased the importance of investment on the quality of tourism services. In this respect, the environmental quality of destination, has become a tool that hotels have to hold the tourism demand. In this paper we are going to present a model of vertical differentiation in the accommodation industry, where differentiation is associated with quality. Additionally, we assume the existence of a lump sum tax in the accommodation industry. Two are the main results which will be proved in this article; first, if the tourist's willingness to pay for quality increases then both the demand and the price for tourism services increase as a result. However, the increment of the demand for best environmental quality gets higher, and therefore, the environmental quality level of tourism services, that the destination offers, decreases. Second, an increase in the value of the tourism tax leads to an increase in the total environmental quality of the destination. Thus, taxation is a policy instrument which maintains the environmental quality of a tourism destination, but its efficiency depends, according to this model, on the value of the tourist's willingness to pay for environmental quality, or similar, on their incomes