Michigan State University Extension
Tourism Educational Materials - 33510408
06/06/02
The Economic Impact of Visitors To Your Community
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 144
Impact studies that examine the economic effects within a
community of development projects such as a new hotel are
usually confined to a fiscal analysis of local government
costs and revenues. But increasing emphasis on the total
environment---social, biological, and business-calls for an
appraisal of broader impacts within the community for a
holistic perspective. Economic impact studies need to
provide information about the effects on jobs, income, or
housing, as well as how a project will affect the
community's overall environment. The effects a project has
on various groups within a community (i.e., its
distribution effects) are often more important than its
economic efficiency.
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
Source: Adapted 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.
An economic impact assessment can become a useful tool for
a community to use in working out what is most economically
effective considering the goals for family income,
distribution of benefits and costs, fiscal impacts,
benefits over time, etc. The approach to setting up such a
study will depend on the situation, the community, and the
analyst's judgment. The study is not the final word on
whether a particular choice should be made; it simply
presents alternatives and their effects. The purpose of an
economic study is to put some practical problems in proper
perspective for a public decision-making process.
Frequently, decisions must be made with less information
than any community would desire.
Communities must also combat a number of misconceptions
about economic impact studies, including an unrealistic
expectation that the analysis can be completely accurate
and comprehensive. Every attempt to increase the accuracy
of a study, also increases its cost and time required. A
balance must be struck between what a community wants to
spend and the desired level of accuracy. Errors in
assessing economic impacts will affect a decision only if
they are so large that the apparent desirability of
alternatives is reversed. If the best alternative appears
substantially superior to the next best alternative, then
it may take only rough computations to confirm that
superiority. If the first and second best alternatives are
not widely separated, it will take greater accuracy to
identify the best choice, but a wrong decision will result
in a relatively small loss. It may be relatively easy to
estimate total benefits and costs, but much more difficult
to estimate the differences in distribution of income and
costs within the community. If distribution impacts are
important there will be more work to do.
Another misconception is that economic impact analysis is
irrelevant because decisions are made on a political basis.
Growing constraints on public spending and tax collection
make it difficult to decide what programs to fund and what
projects to approve. Hard choices have to be made when
funding is available for only one of several worthwhile
projects which annually compete for scarce revenues. The
problem is to decide which project will benefit the
community most, given the goals. Despite the fact the
economic impact assessment has not been used a great deal,
more and more communities find it a valuable tool for
understanding the consequences of political decisions.
Step 1: Define the scope of the study and alternatives to
be considered in the analysis.
Local government decisions fall into three general
categories: plans, policies, and projects. The effects
associated with each category vary somewhat and require
different levels of detail in an analysis. It may take some
time to understand what local officials and leaders want
from an analysis, but care in defining the scope of the
study will save time later and make the results more useful
to those who must interpret them. In general, plans often
provide for broad assumptions and community goal statements
while policies and projects become increasingly specific.
Whether a plan, policy, or project is under consideration,
the basic method of an economic impact study is to compare
alternatives to discover the differences in their economic
effects. In some cases, it may seem easier to analyze only
the original proposal and not to consider any alternatives,
but this will limit the usefulness of the study because it
forgoes consideration of variations that might make the
proposal better suited to the community. In extreme cases,
a decision not to consider alternatives could lead to
rejection of a proposal that, with small changes, could
have benefited the community.
The number of alternatives that should be considered
depends on the number of realistic options available and on
other constraints, such as time, information, funding, and
political realities. Whatever alternatives are chosen,
there must be sufficient information to permit analysis of
the economic impacts at a level that will aid realistic
decision making. It is useful for leadership to limit
alternatives to be included in the analysis to a realistic
number.
Step 2: Define exactly what decisions need to be made, what
information is being requested, and what questions the
study should answer.
Far too often the consultant or analyst determines what
information a community needs and what assumptions are to
be made about the community's goals and resources. An
analyst must understand precisely what decisions local
officials need to make and what information is being
requested to conduct a useful economic impact study. Even
if staff members have been given the responsibility for
choosing alternatives and shaping the study, they may still
want to consult those who will use the study to be sure it
covers the essential points and contains the most useful
information possible. For example, if the staff has been
asked to analyze the economic impact of several general
plan alternatives, there may be certain areas of particular
concern to local government, such as the fiscal effects of
different levels of growth or the effects on employment.
These decisions are the responsibility of the community,
perhaps facilitated by the analyst.
The community should start by listing the types of
questions that the study is to answer. Not all questions
can be anticipated; the study itself may highlight other
areas that need consideration. With an initial list of
areas to be included, however, the analyst can move to the
next step.
Step 3: Determine how detailed the analysis should be.
The scope of the study will depend on several factors:
- What type of proposal is under consideration; a plan,
policy, or project.
- Whether the study is part of a continuing process of
economic analysis or is a one-time request for analysis of
a particular proposal.
- Time and budget constraints.
- Expertise of the available staff within the community.
The audience for the study; the city council, board of
supervisors, or a department chief.
- The geographic area covered and the length of time
considered.
The level of detail a study requires will depend primarily
on the type of proposal being considered. Comprehensive
plans for the entire community obviously will involve
extensive analysis of the present economic conditions and
the expected effects of the plan's alternatives, while a
plan for a particular service in one area of the community
could be analyzed with far less work. Policies and projects
will involve different levels of detail, depending on their
scope or size in relation to the rest of the community.
A second important consideration in determining a study's
level of detail is whether it is a one-time analysis or
part of a continuing program. The initial economic impact
studies will entail more work in gathering the necessary
data and information but if the analysis is continued, each
report that follows will be easier to prepare. Beginning
the work at the broadest plan level will provide a
framework within which to analyze other decisions.
The scope of the study may be partly determined by the
individuals or groups who have requested the analysis. The
city council or planning commission might want only a short
summary of the general impacts of a proposal, while a
department chief might need a detailed study of all the
important impacts. Other constraints on the level of detail
in a study, such as time and budget limitations, will be
beyond the control of the staff. A staff's unfamiliarity
with methods of economic analysis may also add to these
constraints. Local governments may wish to use analysts and
others from outside the community to do much of the initial
work and training.
Two additional limitations on a study are the area it
encompasses and its duration. The area included in an
economic impact assessment should be clearly defined, and
the reasons for its delineation explained, because the
boundaries of political jurisdictions do not necessarily
correspond to the boundaries for housing, land, employment,
economic impacts, or even fiscal impacts on local
government. Some impacts will be zero within certain areas.
For example, new hotel construction may have no effect on
tourism growth in the region, even though it influences the
local area. Or additional hotel rooms in one area may mean
less demand for accommodations in the rest of the region.
Particularly in a metropolitan region, communities cannot
always pinpoint the effects a proposal will have on their
own tourist-related employment or land-use. To do so often
requires an awareness of regional interactions and of
factors outside the local community or government's
control.
The availability of data will play an important role in
defining the study area. The geographic area is generally
that political unit (the city, county, or standard
metropolitan statistical area) for which published
statistics exist. As a practical matter, the final choice
of the geographic area may have to be left open until the
details on the various alternatives are clear. This may
mean working for a period of time with overlapping
geographic areas.
The length of time considered in an impact assessment can
also significantly affect the results. The assessment
should take into account the period that the economic
impacts will be important; the first five years, perhaps,
could be covered in detail and a broader look given to the
life of the impacts. The longer the period of analysis, the
less certain projections become.
Plans usually specify the period for which they apply; the
assessment should provide analysis for the same period.
Since policies may involve temporary decisions or
establishment of guidelines for a community, the analyst
needs to provide an estimate of how long the effects of a
proposed policy are likely to last. Projects have an
initial effect during the construction phase, a continuing
effect through their middle age, and often a different
effect during their declining years. Thus, the economic
impacts should be considered not only during the building
period, but for the entire life of the project, as long as
reasonable estimates can be made, which may require certain
assumptions about things such as future real estate values,
property tax rates, inflation rates, and consumer demand.
Step 4: List in the study all fundamental assumptions and
limitations.
A study's assumptions may cover a wide range of variables,
such as changes in the national economy; the rate of growth
in population, employment, or income; or the continuation
of or change in trends. Whatever alternatives are chosen,
the comparison of impacts will be valid only if the same
methods have been used consistently throughout the
assessment. For example, if inflation effects are
considered in one alternative, they should be considered in
all alternatives. The study should clearly state which
methods are being used and if, for any reason, one
alternative is treated differently, the difference should
be explained. It may be necessary to add to the initial
list of assumptions during the analysis. There may be
opportunities to indicate which assumptions most influence
the long-term benefits and costs of the project. This is
helpful in evaluating the risks associated with the
project.
Limitations in the analysis should be identified. For
example, if the time available to prepare the study is
limited, and some economic areas cannot be covered as
thoroughly as desired, the analyst will want to explain
this limitation and how it affects the study. Likewise, any
limitations in the method of analysis should be thoroughly
discussed to give decision makers an idea of risks inherent
in the outcome.
Step 5: List all economic impacts that are considered.
For a very large project or a major plan, all economic
impact areas will probably be affected, while for
specialized plans, policies, or projects, certain areas may
not be affected. For example, a community's general plan
probably will affect everything from population size to the
delivery of public services, while a ten-unit housing
development will not have significant effects on income
levels or government services except for a small community.
Step 6: Determine what data are needed, what are available,
and how they will shape the study.
In order to evaluate the economic impacts of a change in
land use for a large tourism project, it is useful to
detail past growth trends and to prepare a current
community profile. The analysis of economic impacts may
warrant collection of past and current data to help address
the following:
- Visitor expenditures and their impact on local revenues.
- Estimate of community visitor days so we know if existing
work force and facilities can handle the expected demand
(i.e., measurement of employment, housing, existing land
use, etc.)
- Data to determine the dollar cost and benefit of local
tourism development will help the community assess who will
gain and who will not benefit from the development (i.e.,
local property and sales taxes, costs associated with
traffic congestion, pollution damage, etc.).
Projections of future growth and change also will be
needed. These could be based on historical trends or on a
number of assumptions about the probability of certain
changes occurring. Projections of population and business
activity will be particularly important in evaluating
development proposals.
Finding adequate data can be a major obstacle. A vast
amount of data has been collected and published by
governments and private organizations, but all too often
these data do not provide the exact information needed. All
data must be evaluated on the basis of how they were
collected, what assumptions were made, what items were
excluded, why they were collected, and by whom. The
decision to collect new data will depend on the cost and
time involved, compared to the quality and adaptability of
existing data.
The data available and the need to prepare new data can
shape the type of analysis. If good data are not available
and time does not permit preparation of new information,
these limits should be clearly identified. For example, the
analyst might explain that certain projections of
employment and income are very rough estimates, but they
will have to be relied upon for estimating the effects of
the proposal on public services and land area requirements.
Step 7: Analyze the effect of each alternative on the
individual economic areas being considered and analyze
indirect effects (or cross-impacts) among economic areas.
A plan, policy, or project which imposes a change in one
economic sector of the community may trigger a change in
many of the other sectors as well. When these ties are
understood, the indirect or secondary impacts of a proposal
can also be identified. Figure 1 (Vis. 1)describes a
proposal that a local government might consider and the
kinds of direct and indirect consequences---economic,
demographic, and environmental---which might result from
tourism development.
Figure 1. New Hotel Development for Tourism, Western City,
U.S.A. (Vis. 1)
Step 8: Present results so alternatives can be compared,
identifying the aggregate and distributional impacts of
each alternative.
The aggregate economic impacts include the total effects in
one sector, such as the aggregate employment impacts or the
aggregate impact on housing. Distributional impacts are
those that affect some individuals, groups, institutions,
businesses, and communities more than others. For instance,
land use restrictions imposed on high density housing may
drive up the cost of cheaper housing, thereby directly
affecting lower income families.
STEPS FOR GATHERING, ORGANIZING, AND PRESENTING INFORMATION
FOR AN ECONOMIC IMPACT STUDY
1.Define the scope of the study and the alternatives to be
considered in the analysis.
2.Define exactly what decisions need to be made, what
information is being requested, and what questions the
study should answer.
3. Determine how detailed the analysis should be, depending
on:
- What is under consideration (a plan, policy, or
project).
- Whether this is part of a continuing process or a
one-time request.
- Time and budget constraints.
- The expertise of available staff.
- The audience for the report (e.g., a city council or a
department chief).
- The geographic area covered and the length of time
available to conduct the study.
4. List all fundamental assumptions and limitations in
the study, recognizing that more assumptions may be
added during the analysis.
5. List all economic impacts that are considered,
including all public services that will be affected.
6. Determine what data are needed, what's available,
and how they will shape the study.
7. Analyze the effect of each alternative on the individual
economic areas being considered and analyze the indirect
effects (or cross-impacts) among the economic areas.
8. Present results so that the alternatives can be
compared. This involves identifying both the aggregate and
the distributional impacts of each alternative.
Western Regional Extension Publication
WREP 144
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
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