KI Traveller's Levy Economic Impact Assessment - Kangaroo Island ...

Commercial-in-Confidence
KI Traveller’s Levy
Impact Assessment
3.2 DESIGN SPECIFICATIONS
3.2.1 EFFICIENCY
As the discussion in Section 2 outlined, there are a number of dimensions to the concept of
efficiency in the context of a Traveller’s Levy. In the first instance, economic efficiency
suggests that charges should be levied inversely proportional with the elasticity of demand in
order to minimise the ‘deadweight loss’ or efficiency cost. That is, those with relatively
inelastic demand for travel to KI should be charged a higher rate than more elastic segments
of the market. This would imply that business and VFR travellers should pay a higher levy
than leisure and holiday travellers and it would suggest that residents – if included in the
scope of a levy – should pay a relatively high charge also.
In a cost-recovery framework, where a Traveller’s Levy is conceived in the context of raising
funds to offset the costs of road maintenance (to which travellers are a contributor), travellers
should be charged in proportion with their road usage. This would suggest a differential
charge depending on on-island mode of transport and distance travelled (noting that in
practice, this would likely be prohibitively costly to administer).
Cross-border competitiveness
At the margin, all regional taxes and charges have the potential to impact on the decisions of
individuals and businesses by undermining the competitiveness of a region relative to
alternatives. Depending on the specifications of the tax or charge under consideration, this
can be equally important for both consumers and for businesses. In the case of KI, it must
be considered whether, by adding to the costs of a visit to the Island, the introduction of a
levy would place the Island’s tourism industry at a competitive disadvantage relative to its
rivals. Particularly for the domestic segment of the market, there are a host of opportunities
in a similar price range to a trip to KI (though whether these are perceived as substitutes by
visitors ultimately depends on preferences). Indeed, in the present climate, even short-haul
international destinations such as Bali could be visited at a similar cost.
From businesses’ point of view, a levy would not directly add to the costs of doing business,
but may reduce potential tourism revenues, and hence the likely rate of return on an onisland
investment. At the margin therefore, the supply of tourism services on the Island may
be affected.
The key economic parameter in conceptualising how a Traveller’s Levy would impact on the
Island’s competitiveness is the price-elasticity of demand. 11 If demand is relatively inelastic –
relatively unresponsive to price – then the imposition of a levy, while increasing the cost of
travel to KI and in-principle reducing its competitiveness, will do little to discourage travellers
or encourage them to seek alternative destinations. From a design perspective, the
prescription is therefore a levy which is targeted most heavily at those segments of the
market which are least responsive to price – business travellers and those visiting friends
and relatives
11 Impacts on substitutes for KI (i.e. KI’s competitors) are more directly reflected in the cross-price elasticity of
demand (the percentage change in demand for other destinations resulting from a one percent change in the
price of a KI trip), however the own-price elasticity provides a measure of the aggregate impact.
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