Welfare and Environmental Degradation in a Tourism-Based Economy

Abstract

This paper presents an endogenous growth model for a tourism economy that takes into account the particular interrelationships between natural and physical capital, the production of tourist services and environmental degradation. The model considers both infrastructure and environmental attributes as production factors, characterized by a predator–prey relationship arising from the negative influence of the development of physical infrastructure on the natural capital. A general condition for economic sustainability is derived from the model analysis. In addition, the transitional dynamics obtained by using specific functional forms depict the empirically observed tourist life cycle and extend the optimal paths obtained from the classical Ramsey model to the context of tourism-based economies strongly dependent on fragile environmental resources.