Elasticities relevant to tourism in Scotland: evidence review

Executive summary

Through a rapid systematic review of international literature, this report provides an overview of the existing estimates of the potential price elasticities of demand (PED) and income elasticities of demand (YED) for tourists to destinations that may be relevant to Scotland, and those using commercial accommodation; price elasticities of supply (PES) of commercial accommodation relevant to Scotland; and other factors influencing changes in demand and supply in tourism. The report also summarises available primary literature on tourists' behavioural responses to taxation. However, due to the unavailability of studies on Scotland, the evidence reviewed in this report was based on destinations that may be comparable to Scotland as identified in a cluster analysis. Therefore, the results provide a possible approximation rather than the actual elasticities for Scotland.

To provide an up-to-date overview of evidence, a systematic literature review was conducted to gather information from primary studies published post-2010. As a systematic approach, the pre-specific search methodology ensures comprehensive, transparent and replicable results. As no empirical study was found to estimate the elasticities for tourism in Scotland, studies on European destinations and Scotland's top source markets were firstly reviewed. A cluster analysis was then carried out to identify the most comparable tourism destinations to Scotland. As a result, 11 destinations were found most relevant. Elasticities for these destinations estimated by destination-specific studies were then considered as an approximation of tourism elasticities for Scotland.

Regarding the European destinations in general, it has been found that the overall median PED for inbound tourism is on the borderline between elastic and inelastic (-1.02), while the overall average PED indicates a relatively elastic demand (-1.26). Regarding the YED, outbound tourism is likely to be perceived as a luxury consumption by tourists from most European countries/regions as well as the top source markets for Scotland.

In terms of the most relevant destinations to Scotland as identified through cluster analysis, the overall median estimates suggest that inbound tourism is likely to be price elastic and to be perceived as a luxury consumption. However, the findings are based on limited recent evidence of varying quality for destinations relevant to Scotland. The relatively wide ranges within the elasticities for destinations that might be relevant to Scotland indicate considerable uncertainties potentially caused by the difference in the modelling methods, explanatory variables, destination-source market pairs and data used in the literature. Cautions should be exercised when interpreting the findings.

In the search of recent literature on the price effect of taxation, only a limited number of primary studies have been identified. A general understanding is that an increase (or decrease) in tourism taxes may lead to a decrease (or increase) in the quantity of tourism demand, with other factors remain unchanged. This is consistent with the law of demand in economic theory. However, the impact of an increase in tourism taxation on tourists' expenditure would depend on the tax in question, consumers' PED, the PES, and other factors influencing both demand and supply. For instance, between VAT and accommodation occupancy taxes, past literature argues that the latter tend to have a more moderate effect on tourism demand, but they are likely to induce a psychological impact on tourists and could affect repeat tourism. As for different travel purposes, business travellers and non-coastal holidaymakers tend to have a price-inelastic demand, while leisure travellers particularly coastal holidaymakers are likely to have a price-elastic demand. Therefore, an increase in tourism taxation would likely result in higher tourism receipts from business travellers and non-coastal holidaymakers, but lower receipts from leisure travellers especially coastal holidaymakers. Additionally, while most of the studies on the impact of tourism taxation focused on the price effect of tourism taxes, tourist behaviour is also affected by non-price factors such as advertising and news, of which research is currently limited.

A significant gap in the existing literature is that there is no direct evidence for Scotland. To address this gap, future research on price effects could focus on conducting primary studies underpinned by rigorous modelling methods utilising various primary and secondary data sources. In addition, survey-based tourist behaviour research on non-price effects of tourism taxes is also necessary to reach a fuller understanding of the overall effect of tourism taxation on tourist behavioural changes.