Wednesday, 6 June 2018

Price discrimination and the Great Walks

In today's New Zealand Herald, Brian Rudman argued against charging different prices to tourists and locals for access to New Zealand's "Great Walks":
Last weekend, Green MP and Conservation Minister Eugenie Sage, followed through with the previous National Government's pledge to up fees to cover costs. But she managed to retain the existing subsidy for the New Zealanders who make up about 40 per cent of users. Kiwi trampers will now bludge off their overseas fellow travellers, whose hut fees will double to $140 per night on the Milford Track, $130 per night on the Kepler and Routeburn Tracks and $75 per night on the Abel Tasman Coastal Track. Kiwi trampers fees will remain unchanged at half this rate. In addition, international children under 18 will now pay the full fee, while New Zealand kids will pay nothing.
Eugenie Sage says the free ride for Kiwi kids is "to encourage our tamariki to engage with their natural heritage." Fair enough, but why are they and their parents, doing their "engaging," at the expense of overseas visitors and their children? They certainly wouldn't get half-rates at a beach motel or bach over the same period...
It now seems "fleece the tourist" has become the new game of the day.
Indeed, and as I have argued before, so it should. Price discrimination in tourism (where locals pay different prices to tourists) is the norm internationally. New Zealand is out of line with global practice with our insistence that locals have to pay the same jacked-up prices that cash-cow tourists pay.

The first problem here is that the "Great Walks" cost more to service than they attract in fees (another point I've made before, when the Great Walks were free). So, realistically the government has to increase fees to cover those costs (or else be subsidising trampers at the expense of hospitals or schools or something else - no subsidy comes 'free' of opportunity costs). There is no rule that says there has to be one price for all, and in fact it makes more sense to charge higher prices to tourists.

Consider the difference in price elasticity of demand. Tourists have relatively inelastic demand for the Great Walks. They've come a long way to New Zealand, incurring costs of flights and so on. The cost of going on the Great Walks is small in the context of the total cost of their holiday in New Zealand. So, an increase in the price of the Great Walks is unlikely to deter many of them from paying (so, their demand is relatively price inelastic - relatively less responsive to a change in price).

In contrast, for locals the price that DoC would charge for access to the Great Walks makes up the majority of the total cost of going on the Great Walks. So, a change in the price is much more significant in context for locals (so, their demand is relatively price elastic - relatively more responsive to a change in price).

When you have two sub-markets, one with relatively more elastic demand and one with relatively less elastic demand, and you can separate people by sub-market, then price discrimination is an easy way to increase profits. Of course, the government isn't trying to profit from the Great Walks. It is trying to raise money to cover the costs while keeping access open to the maximum number of people. And that's exactly what price discrimination would allow. Charging a higher price to tourists raises the bulk of the money from tourists without deterring too many of them from going on the Great Walks, while simultaneously keeping the price low enough that locals would also want to go on the Great Walks.

Of course, you could argue, as Rudman does, that tourists are losing out on the deal. Which of course is true - their consumer surplus (the difference between the maximum they would be willing to pay and what they actually pay for access to the Great Walks) does decrease. However, I can't see why it is government's role to protect the consumer surplus of people who aren't New Zealand taxpayers (except to the extent that we don't want to overly deter tourists from coming to the country at all).

Raise the price of access to the Great Walks, and raise it even more for tourists. They can afford to pay, and would be happy to do so, having come all the way here to see the sights.

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