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4 t h Edition Leisure, Sport and Tourism, Politics, Policy and Planning

This chapter discusses the cost-benefit analysis and economic impact analysis in tourism, providing insights into identifying, measuring, and comparing costs and benefits. It explores the value of time and the concept of value transfer. The chapter also covers the measurement of externalities and the methods for assessing user benefits.

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4 t h Edition Leisure, Sport and Tourism, Politics, Policy and Planning

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  1. CABI TOURISM TEXTS 4th EditionLeisure, Sport andTourism, Politics,Policy and Planning A. J. Veal COMPLEMENTARY TEACHING MATERIALS

  2. Leisure, Sport and Tourism, Politics, Policy and Planning, 4th Edition CHAPTER 14 Economic Evaluation Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  3. Outline Introduction Cost-benefit analysis Economic impact analysis Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  4. Cost-benefit analysis • Measurables and unmeasurables • The cost-benefit approach • Identifying and measuring costs • Identifying and measuring benefits • Measuring private benefits – travel cost and other methods • Comparing costs and benefits • The value of time • Value transfer Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  5. Measurables and unmeasurables CBA involves identifying all costs and benefits, and measuring and comparing what can be measured, but not everything may be measurable. Decision makers must ultimately decide whether: A–C (measurable net costs) or C–A (measurable net benefits) outweigh the non-measurables B and D. Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  6. The cost-benefit approach to project evaluation (Table 14.2) Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  7. Identifying and measuring costs • Capital costs – costs of building the facility: upfront and annual • Running costs – annual costs of: staffing, materials, heating, lighting, transport, etc. • Externalities as costs • Opportunity costs – the value of the resource in an alternative use – e.g. parkland as housing/offices Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  8. Externalities(or ‘third party’ or ‘neighbourhood’ effects) (from Chapter 5) • Market under-provides or over-provides, due to specific benefits enjoyed or costs imposed, but not paid for, by specific third parties • Negative: costs imposed on third parties, e.g.: – air pollution, noise pollution, congestion • Positive: benefits to third parties, which they do not pay for, e.g.: • environmental/amenity benefits of a golf course to surrounding properties; public tourism attractions Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  9. Adelaide Grand Prix study (Table 12.3) *including multiplier effects SA = South Australia (Source: Burns et al., 1986) Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  10. Adelaide Grand Prix study: Psychic income calculation • 20% of population experienced extra travel costs due to congestion/diversions during the Grand Prix • Total extra travel costs: $6.2m • Proportion of the above who were still in favourof hosting the Grand Prix: 90% • Total extra travel costs of the 90%: $5.6m • Psychic value of Grand Prix for this group (20% of population): at least $5.6m • Psychic value of Grand Prix for whole population: (5 x $5.6m) $28m Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  11. Traffic congestion costs (Table 14.4) (Hypothetical data) Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  12. Identifying and measuring benefits • User benefits: • willingness-to-pay or ‘contingent’ method • travel cost or Clawson method • hedonic pricing Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  13. Willingness-to-pay or ‘contingency’ method • Users of free public facilities are asked in a survey what they would be willing to pay. • Possibility that respondents will: • under-state, just in case there is a plan to introduce charges • over-state to ensure support for the facility Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  14. Travel cost or Clawson method • Based on: • the observation that fewer people use a facility as travel costs increase • deriving a classic demand curve (price v. quantity) • measurement of consumer surplus • Box 14.2 Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  15. Travel cost/Clawson method: site/travel zones Site A B C D

  16. Travel cost/Clawson method: data (Table 14.5) Plot on a graph Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  17. Travel costs x visit rates (Fig. 14.2) Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  18. Travel cost analysis to estimate a demand curve (Table 14.6) Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  19. Travel cost analysis to estimate a demand curve (cont’d) Plot on a graph Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  20. Demand curve (Fig. 14.3) Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  21. Consumer surplus • Gives estimate of value to users • For explanation of consumer surplus, see Chapter 5. Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  22. Hedonic pricing • Alternative way of estimating user value • Willingness to pay for enjoyment of aspects of the site – e.g. value of a park reflected in price of houses with views/access Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  23. Other issues: value of time • Some benefits of projects are time savings • This can apply to leisure projects (e.g. new tourist route), so savings are of leisure time. • How is leisure time valued? • Research indicates people’s willingness to pay money to save their own leisure time and the value they place on it. • Equity issue: Should the leisure time of poorer people be valued at less than that of wealthy people? Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  24. Other issues: value transfer • CBA expensive to conduct • Use results of generic studies to evaluate projects (as in road projects) • See US Forest Service project: • Rosenberger and Loomis (2001) • www.fs.fed.us/rm/pubs/rmrs_gtr72.pdf Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  25. Comparing costs and benefits (Table 14.7) Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  26. The life of a project • Costs and benefits spread over the life of a project – e.g. for a building: 50+ years? • Costs/benefits variable over time and between projects • All costs/benefits valued in current terms by means of discount rate (opposite of interest rate) • Examples: Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  27. Two projects compared: Net Present Value (Table 14.8) * Calculations not shown Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  28. Life of a project: 2 projects compared (Fig. 14.1) Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  29. Switching values • Minimum value of benefits if project is to go ahead (Table 14.9 example) • Decision-makers decide whether £2 subsidy is acceptable Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  30. Economic impact analysis • Introduction • Counting the cost • The multiplier • Economic significance studies Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  31. Introduction to economic impact studies • Concentrates on income and jobs • May be undertaken: • before initiating a project, as aid to decision-making • after completion of project, as part of evaluation • after a single event, to persuade funders to support future events • In relation to industry sectors – economic significance studies Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  32. Counting the cost • Importance of defining the study area • e.g. country, region/state, county/sub-region, local government area/city • Impact is created by money spent in the study area by: • visitors (‘tourism multiplier’) • external investors • higher levels of government Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  33. The multiplier • Money spent in an area by visitors, investors or higher levels of government circulates, creating further impacts. • Therefore, if £1 initial expenditure eventually creates £2 of income, the multiplier is 2. • This can be calculated. Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  34. Estimating the multiplier: data requirements • Firms’ expenditure: • goes to other local firms • goes to local residents as wages/salaries • leaves the area (e.g. taxes, imports, profits) = ‘leakage’ • Discovered by industry survey, e.g. • 25% to local firms • 40% to local residents • 35% leaks • Residents’ expenditure spent (a) locally, (b) outside the area (leakage) • Discovered by resident survey, e.g. • 50% to local firms • 50% leaks Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  35. Multiplier calculations: diagram (Fig. 14.5) Leaks Local firms Round Leaks Individuals 1 Initial cost $1000 35% 40% 25% 2 $350 $250 $400 50% 50% 3 $200 $87.50 $200 + 62.50 = 262.50 $100 4 $50 $91.88 $50 + 65.63 = 115.63 $105 5 $52.50 $40.47 $28.91 + 52.50 = 81.41 $46.25 etc. etc. etc. etc. etc. Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  36. Multiplier calculations (cont’d) • Each round produces a smaller impact because of leaks. • Fig. 14.5 shows around 14/15 producing local impacts of <$1. • Aggregate impacts: • business turnover: $1817.63 • resident incomes: $726.90 • Various multipliers: • business turnover multiplier: 1817.64/1000 = 1.82 • orthodox income multiplier: 726.90/400 = 1.82 • unorthodox income multiplier: 726.90/1000 = 0.73 • Different firms’ and individuals’ expenditure ratios affect the size of multipliers. Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

  37. Economic significance studies Studies that demonstrate the economic significance of industry sectors, e.g. leisure industry, sport industry, cultural industries, tourism industry Leisure, Sport and Tourism, Politics, Policy and Planning, 4th edition, Veal, 2017, CABI Tourism Texts

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