Michigan State University Extension
Tourism Educational Materials - 33510407
06/06/02
Cost Benefit Analysis of Local Tourism Development
List of files and visuals associated with this text.
Source: Western Rural Development Center
Authors:
George Goldman
University of California, Berkeley
Anthony Nakazawa
University of Alaska
David Taylor
University of Wyoming
ID: WREP 147
Before developing a plan or deciding to add facilities to
increase tourist potential, ask the question, "Is it worth
it? Will tourism do for this community what we want done?"
The cost-benefit technique balances costs against benefits
to show the estimated net effects of a plan. The study may
be very comprehensive, like those prepared by the U.S. Army
Corps of Engineers for water resource projects, or it may
be rough-and-ready, the type often used by smaller
communities.
This publication shows how to develop a rough-and-ready
cost-benefit study for tourism assessment.
This is a publication of the Western Rural Development
Center. WRDC publications are sold on a cost-recovery basis
and are available on request from the Center at the address
below.
The Western Rural Development Center offers its programs
and materials equally to all people.
Western Rural Development Center Oregon State University
Ballard Extension Hall 307
Corvallis, Oregon 97331-3607
(503) 737-3621 FAX (503) 737-1579
Prepared December 1994.
Source: Adapted from Tourism USA, Guidelines for Tourism
Development, The University of Missouri, Department of
Recreation and Park Administration, University Extension,
revised and expanded 1986, pp 61-65, and from California
Economic Practices Manual (chapter 1).
Regional Tourism Fact Sheets
WREP 144 the Economic Impact of Visitors to Your Community
http://www.ext.usu.edu/WRDC/resources/tourism/wrep144.html
WREP 145 Measuring Visitor Expenditures and Their Impact on
Local Income
http://www.ext.usu.edu/WRDC/resources/tourism/wrep145.html
WREP 146 Estimating Visitor Demand and Usage
http://www.ext.usu.edu/WRDC/resources/tourism/wrep146.html
WREP 147 Cost-benefit Analysis of Local Tourism Development
http://www.ext.usu.edu/WRDC/resources/tourism/wrep147.html
Community leaders, or others involved with tourism-related
community) development, can use this series of fact sheets
to lead a focused discussion on the economic benefits of
tourism. Who will benefit from tourism? How many tourists
will a new project bring to the community? How much will
new tourists spend in your community? This series of fact
sheets is designed to address these questions, which must
be answered in order to realistically evaluate decisions
related to local tourism development.
First, list the applicable benefits, then do the same with
costs. Some items will be known with reasonable accuracy,
some will be guesstimates, and others may be immeasurable.
The following information is necessary to estimate benefits
and costs.
- An inventory of public support services with the present
range and capacity of those facilities. Support services
might include police, sewer, water, rest rooms, streets,
medical facilities, rescue systems, parks, solid waste
arrangements, camp grounds, etc. (see WREP 146 Estimating
Community Visitor Days). If the capacity does not meet
present or future demands, expansion of those facilities
that are in short supply must be taken into account as a
cost of tourist development. Be sure to ascertain whether
both public and private support services must be expanded.
Private support services might include: guide service,
hotel and motel rooms, restaurants, transportation.
- A projection of the expected number of visitors (see WREP
146).
- An estimate of the expenditures tourists will make.
Multiply the anticipated increase in types of tourists (day
visitor, overnight, or camper) by the expenditures expected
for each type, including any changes in expenditure levels
expected with the new facilities, to estimate the increase
in sales as a result of tourism development. WREP 145,
Impact of Visitor Expenditures on Local Revenues, gives the
procedures for calculating this figure. Benefits most
commonly associated with tourism are increased local in
comes and employment, but there may be additional benefits.
- Tax revenues might increase, providing tax relief to
local residents if additional revenues exceed the costs of
additional services.
- Tourism may provide a means of diversifying the existing
economy or of reducing the seasonable fluctuations,
particularly important in areas dominated by one industry.
Of course, tourism can compound the challenges of
seasonable variation in many situations.
- Tourists may also be important for cultural or social
reasons. The Totem Wood Carving Workshop, located just
outside of Ketchikan, Alaska, in the Native Village of
Saxman, is a major tourist attraction for thousands of
visitors to Southeast Alaska. In addition to providing
renewed cultural pride, tourism development has aided
Saxman's economy. Local festivals and celebrations are
important cultural events and tourist attractions in
hundreds of communities.
Any increase in the demand for public services (for
example, extra police or improved public rest rooms), is a
cost of tourism development. The costs of promotion should
also be included. If time is donated, the value of
volunteer time may be calculated by multiplying hours
worked by an appropriate wage rate, not lower than the
minimum wage.
The costs and benefits of tourism development can be
measured with varying degrees of precision. Unmeasurable
items should be indicated with a plus(+)for a benefit or a
minus (-) for a cost (see Figure 1).
(Vis. 1)Environmental costs and community resentment
attributable to tourism are examples of negative items.
With imagination and research, even these may be given
dollar estimates in certain cases, for example costs for
hauling additional solid waste, travel delays, higher
housing costs, etc.
After all of the costs and benefits have been estimated and
entered in the table, subtract the total costs from total
benefits to derive net measurable benefits. The net
measurable benefits should be positive before a community
proceeds with a tourism development program.
Another useful measure is the benefit-cost ratio. This is a
"best guess" of the rate of return on identifiable
investment costs. If benefits divided by costs equal, for
example, 1.2, this implies that for every $1 of costs,
$1.20 will be returned to the community.
However, many important effects of tourism development
cannot been considered in economic terms. Pluses and
minuses in the table must be considered. Community members
can determine appropriate weights for each plus and minus.
There may not be agreement whether any one item is a plus
or a minus (one person's solitude is another's loneliness)
but all items should be consciously listed and net measured
benefits calculated. In the course of this procedure, ideas
may arise which will accent either the pluses or the
minuses.
Because community support is an essential ingredient to the
success of a tourism program, consensus is vital. If the
pluses outweigh the minuses, perhaps the plan should
proceed. If, however, minuses outweigh pluses, maybe the
plan should be reconsidered or changed. Outweighs is the
key, not outnumber.
Use of the cost-benefit technique is illustrated by a case
study of Western City, U.S.A., see Figure 1(Vis. 1).
Located in the Northwest, Western City has a population of
25,000, which has been stable over the last ten years. The
principal industry was and is logging, but for the last
five years or so, timber work has been sporadic and the
community fears that the town will die.
The Chamber of Commerce proposed that tourism be
aggressively developed over a five-year period. The Chamber
calculated a benefit-cost ratio of 2.17. Thus, every $1 of
cost should return $2.17 to the community. Figure I shows
their calculations. All amounts are in thousands of dollars
per year for a five-year period on a 1991 basis (so
inflation is accounted for in the costs and benefit
estimates).
The $75,000 in family income was determined by estimating
the number of additional tourists who will be attracted to
the community. The goal is to bring an additional 10,000
visitors per year, thirty percent of whom are expected to
stay overnight and spend an average of $50 per person per
visit. Day visitors are expected to spend $20 per visit.
Thus, tourist expenditures were calculated to be $290,000
per year. The tourist expenditures were multiplied by 0.4
to estimate the amount of money ($116,000) retained in the
community. This reflects the fact that a portion (0.6) of
these expenditures immediately leaves the area to pay for
goods and services not provided locally. Research indicates
that revenue retained locally in the northwestern United
States is between 0.3 and 0.5 of the total money generated
by tourists. Thus, local additional money per year is
estimated in this example as $116,000.
Wages were determined by estimating the number of
additional jobs necessary to serve an extra 10,000 visitors
and $290,000 of additional sales per year. The inventory of
support services and labor supply indicates that five
additional full-time jobs would be required at an average
salary of $10,000. There also would be ten additional part-
time employees at an average wage of $2,500 per year for
total wages of $75,000.
Revenues from a bed tax on hotel and motel occupants are
expected to increase by $1,400 per year based on a five
percent tax rate and average nightly rates of $28, with
2,500 of anticipated 3,000 overnight visitors staying in
hotels and motels and an average of 2.5 visitors per room.
Figure 1. Estimated benefits and costs of proposed
tourism development program, Western City,
U.S.A. 1992-1996.(Vis. 1)
Inventories indicate that existing private facilities could
accommodate the additional tourists, however, there would
be increased support service costs. Expansion of the
parking lot adjacent to the local park would alleviate
parking problems on Main Street as well as at the park. To
accommodate the visitors, another part-time police officer
and patrol car and a public restroom at the park would be
required. Repair of heavily traveled streets was another
anticipated expense. A local contractor placed the annual
costs of expanding and maintaining the parking lot at
$7,000. The police officer's salary is estimated at $15,000
per year. The annual operating costs of the patrol car and
rest room facility are estimated at $7,000. The street
department estimated street repair at $19,830 per year.
Items four and five are "guesstimates" and unmeasurables
are presented as pluses or minuses.
Development of tourism can be a positive economic step, but
too frequently unmeasurable but important costs are not
considered. A cost-benefit analysis provides a framework to
identify the likely economic impacts---both measurable and
unmeasurable---associated with tourism development.
Figure 2. Calculations and sources of information,
tourism development program Western City, U.S.A.
(Vis. 2)
Western Regional Extension Publication
WREP 147
January 1995
Issued in furtherance of Cooperative Extension work acts of
May 8 and June 30, 1914, in cooperation with the U.S.
Department of Agriculture, Lyla Houglum, acting director,
Oregon State University Extension Service.
Other western State Extension directors include: Hollis
Hall, University of Alaska; Salei Afele-Faamuli, American
Samoa Community College; James A. Christenson, University
of Arizona; Kenneth R. Farrell, University of California;
Milan A. Rewerts, Colorado State University; Chin Tian Lee,
University of Guam; Noel P. Kefford, University of Hawaii;
Leroy D. Luft, University of Idaho; Anita R. Suta, College
of Micronesia; Andrea L. Pagenkopf, Montana State
University; Bernard M. Jones, University of Nevada/Reno;
Jerry Schickedanz, New Mexico State University; Antonio
Santos, Northern Marianas College; Robert Gilliland, Utah
State University; Harry B. Burcalow, Washington State
University; Jim DeBree, University of Wyoming.
Extension invites participation in its programs and offers
them to all people without discrimination.
This material is based upon work supported by the Extension
Service, U.S. Department of Agriculture, under special
project number 93-ERRD-1-8501.
This information is for educational purposes only. References
to commercial products or trade names does not imply
endorsement by MSU Extension or bias against those not
mentioned. This information becomes public property upon
publication and may be printed verbatim with credit to MSU
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