Should Airline Travel for Tourism Be Restricted in the UK?

 by Ben Millard

Dane Deaner

When a good is consumed, if it has an impact on society that is positive, it has what are called positive externalities of consumption and is therefore called a merit good. The opposite is true for goods which do harm to society when consumed, and these are called demerit goods.

Aggregate demand is a way of measuring the output of goods and services in an economy. It is the sum of all of the consumer spending, investment in capital goods, government spending on goods and services and the balance of payments (the value of exports minus the value of imports in an economy.

On the one hand, airline travel for tourism can be seen to be a merit good as when people fly by plane to another country for the purpose of a holiday, they will inevitably spend their money on goods and services in the foreign economy. The tourism industry in that economy will benefit, in that those employed in the industry will have higher wages and therefore more disposable income. This additional income will be spent on other goods and services in the foreign economy which is an increase in the consumer spending element of the aggregate demand formula. This is shown on the diagram below as a shift to the right of the aggregate demand curve.

A shift right in the aggregate demand curve means that the output level, or GDP, of the economy has increased. In this way, airline travel for tourism is a merit good because by consuming flights, tourists stimulate economic growth in the country that they travel to. As the benefit to society is greater than the welfare that the tourists gain themselves from the act of travelling to the other country. On a diagram, this is represented by the marginal social benefit curve (MSB) appearing above the marginal private benefit (MPB) curve.

As the tourists do not fully understand the positive impacts that their consumption of flights has on the foreign economy, they underconsume flights. This creates a welfare loss, which is represented by the shaded area on the diagram, representing the utility that could be gained by the foreign economy if more tourists came to their country. The welfare loss can be reduced by encouraging flying to other countries, shifting the MPB curve toward the socially optimal equilibrium at MSC=MSB. In this way, airline travel should not be restricted as it will help foreign economies to recover from the impacts of Covid-19, especially those which heavily rely on tourism to generate GDP. However, the stimulation will only be significant if the employees of the tourism industry in  that economy have a large marginal propensity to consume. This is the extent to which they will spend a large proportion of any extra income that they earn, and therefore if this is higher, the economy will be stimulated more than if the marginal propensity to consume is low.

On the other hand, airline travel for airline travel can be seen as a demerit good. This is due to the environmental impact that airline travel has. The aviation industry accounts for 2.4% of global greenhouse gas emissions from fossil fuels. Greenhouse gases enhance the effects of climate change which will damage the global environment, potentially causing the loss of food sources and homes. This demonstrates how airline travel for tourism has negative externalities of consumption and therefore is a demerit good. On a diagram, the MSB will be below the MBP, as society does not benefit as much as the individual tourists do.

In this diagram, the tourists do not fully appreciate the negative impacts that their use of airline travel has so they overconsume flights. This creates a loss of welfare, which is the shaped area on the diagram and represents the cost to society of the environmental impact that flights have. Therefore it can be argued that the amount of airline travel that is consumed should be restricted, for instance by a tax on flights. This will have the effect of moving the MPB curve closer to the socially optimal equilibrium at MSB=MSC and will reduce the welfare lost to the environmental consequences of the flights. The coronavirus pandemic represents an excellent opportunity for reducing flights as there is currently an additional cost connected to that of a flight, which is the price of a PCR test. This could be made mandatory for some time, and will discourage many people from using planes to access their holidays.

The judgement to restrict airline travel should be based on three criterea: the extent to which the cost of climate change outweighs the benefits gained by other countries from tourism, the marginal propensity to consume of the other countries and the probability of unintended consequences of reducing access to flights. Currently, natural disasters cost the world economy $390 billion per year, which is expected to increase if climate change persists. Simply, the government should restrict or encourage flights such that the welfare lost to climate change is equal to the welfare lost to the foriegn economy when flights are underconsumed. This will have the effect of averaging out the two MSB curves, making the MSB = MPB and meaning that the cost of climate change is cancelled out by the economic stimulation gained by the world economy from travel. The amount of stimulation gained depends on the marginal propensity to consume of those employed in the tourism industry. If this is low, the amount of flights should be restricted more as the additional income will not be spent on growing the foreign economies. Finally, if flights are restricted in the UK, the government risks the jobs of those in the airline and tourism industries. A judgement must be made as to whether these jobs outweigh the costs that climate change will have on the country.