Deciding how to fund tourism is tricky: On the one hand there are a fairly well-defined group of firms who gain most of the benefits. On the other hand, a large, ill-defined group of firms benefit somewhat from tourism and promotion of New Zealand as a destination is common property. Once you’ve spent money on a promotional campaign and people decide to come to NZ, you can’t restrict access to those tourists to the firms that paid for the campaign. However, tourists’ spending is rival since each dollar can only be spent at one place. The problem with common resources is that nobody has the incentive to provide them.
Ordinarily you might ask the government to sort out the problem, but then the government is basically subsidising an advertising campaign for the tourism industry. One answer is for a tourism industry body to fund advertising campaigns for its members jointly. The problem here is that nobody has an incentive to join such a body, since they get the benefits of promoting NZ as a destination whether they’re in it or not. Furthermore, the industry rightly points out that its advertising is subsidising revenue for all businesses who have some custom from tourists.
John Key’s solution is to match industry advertising spending dollar-for-dollar. I like the way this boosts spending to take account of the benefit to firms outside the tourism industry. Hopefully it increases tourism spending to somewhere near the optimal level. What concerns me is that there is no mechanism built in to the scheme to prevent freeriding from industry participants. nor can I see any convincing mechanism by which participants in the scheme could punish those who choose to freeride. I’m curious to know how the Tourism Industry Association deals with the problem.