The Economic Challenges of Over versus Under Tourism

“Tourists go home!” The streets of Barcelona echoed with the chants of thousands of frustrated residents, fed up with the overwhelming surge of visitors each year. In August 2024 alone, 10.9 million visitors flooded the city, driving up housing costs and transforming historic neighborhoods into short-term rentals [1]. While traditional travel hot spots like Barcelona and Venice struggle with excessive tourism, emerging destinations are taking the opposite approach as they fight to attract visitors. Saudi Arabia, for example, has committed over $800 billion to its Vision 2030 plan, betting on luxury resorts and cultural sites to transform tourism into a pillar of its economy [2]. Yet, despite the massive investment, there is uncertainty over whether visitors will come in the numbers projected, raising concerns about over-investment and economic inefficiencies. State-driven tourism can generate economic growth, but misaligned investment often leads to inefficiencies. Over-tourism strains infrastructure and inflates housing costs, while under-tourism risks wasted resources and financial losses. A sustainable approach requires balancing state involvement with market-driven strategies to ensure long-term economic stability.

Effects of Over-Tourism: When Growth Becomes a Burden

Over-tourism creates significant economic distortions, particularly in housing markets, infrastructure, and overall economic stability. While tourism contributes to GDP growth and employment, unchecked visitor growth can lead to inefficient resource allocation, increased living costs, and economic fragility. The economic benefits must be weighed against their external costs, particularly when rapid growth overwhelms local economies and displaces residents.

One of the most immediate economic effects of over-tourism is housing market distortion. As demand for short-term accommodations increases, rental markets become misaligned with local economic conditions, making housing unaffordable for residents. Platforms like Airbnb have exacerbated housing shortages by incentivizing property owners to convert long-term rentals into high-yielding short-term stays, reducing supply for residents and inflating housing prices. This economic recalibration has had multifaceted impacts, from escalating housing prices to altering neighborhood dynamics [3]. In Barcelona, residential real estate prices have increased by an average of 38% over the past decade, to a price beyond affordability, forcing many residents to relocate [4]. In response, the city announced in 2023 that it would phase out all short-term rental licenses by 2028 in an effort to restore housing availability for locals and curb speculative investment [5]. While such regulations attempt to reverse the adverse effects of over-tourism, they also pose risks. Such restrictions could reduce foreign investment and weaken key sectors like real estate and hospitality, which rely on tourism demand.

Beyond housing pressures, over-tourism places excessive strain on public infrastructure, leading to significant economic costs in urban planning and resource management. A substantial portion of tourists in major cities are day-trippers who arrive for only a few hours, benefiting from public services but contributing minimally to the local economy. These visitors often take advantage of free or low-cost attractions while avoiding expenses associated with overnight stays, such as hotel taxes or extended restaurant spending. This phenomenon has created an imbalance in which cities bear the costs of managing high tourist volumes without receiving sufficient revenue to offset the financial burden [6]. In Venice, for example, the number of day-trippers can range from 30,000 to 40,000 per day, while the city’s official resident population is only around 50,000 [7]. Public transportation networks, originally designed to serve local populations, struggle to manage the influx of short-term visitors, leading to overcrowded stations, traffic congestion, and increased pollution. The high cost of maintaining public infrastructure in response to excessive tourism forces local governments to redirect funds from other essential services to impose additional taxes on tourists. In 2024, Venice introduced a “day-tripper” fee requiring short-term visitors to pay an entry tax, designed to generate revenue for city maintenance while reducing congestion [8]. While such taxation schemes provide immediate economic relief, they are unlikely to resolve the underlying issue of infrastructure overuse. There is a risk that aggressive pricing mechanisms could deter tourists and shift demand to competing destinations, leading to long-term revenue loss without significantly alleviating the city’s economic pressure.

In addition to local economic distortions, over-tourism creates macroeconomic vulnerabilities by making destinations overly dependent on tourism revenue. In economies where tourism contributes a significant portion of GDP, external shocks such as global recessions, pandemics, or geopolitical instability can result in severe downturns. The COVID-19 pandemic provided a stark example of the risks associated with tourism overreliance. In Bali, where tourism accounts for more than half of regional GDP, the local economy contracted by 9.3% in 2020, as international travel restrictions forced businesses to shut down and eliminated thousands of jobs [9]. The economic impact was exacerbated by the lack of alternative revenue streams, leaving the region financially exposed and requiring government intervention to sustain basic economic functions. Similar patterns emerged in Thailand, Italy, and Spain, where entire industries were paralyzed due to the absence of tourists. While tourism remains a crucial source of revenue for many cities, over-dependence on the industry leaves economies exposed to external shocks, highlighting the need for diversification and sustainable long-term planning [10].

Opportunities and Risks of Government-Led Tourism Initiatives

Over-tourism reveals the vulnerabilities of economies overly dependent on visitor spending, often reducing the quality of life for residents. While some destinations struggle to manage excessive tourism, others look to expand it as a path to growth and diversification. State-driven tourism initiatives present both economic opportunities and financial risks, particularly in economies seeking diversification or global positioning.

One of the primary advantages of government-led tourism initiatives is economic diversification. Countries that rely heavily on a single industry, such as oil or manufacturing, often turn to tourism as a means to stabilize economic growth and create alternative revenue streams. Saudi Arabia, for example, has positioned tourism as a key pillar of its Vision 2030 plan, aiming to reduce its dependence on oil and develop new sectors such as energy, finance, and hospitality. They aim to attract over 100 million visitors annually by 2030 and establish itself as a global tourism destination [11]. This transition allows the government to create a more balanced economy that is not solely dependent on commodity markets. Tourism growth also stimulates related industries, including transportation, retail, and finance, generating a multiplier effect that supports broader economic expansion12. Additionally, diversification through tourism expands employment opportunities across different skill levels, from entry-level service jobs to managerial and technical roles, helping to increase workforce participation and reduce unemployment.

However, government-led tourism expansion also carries significant financial risks, particularly when investment outpaces organic demand growth. Tourism infrastructure projects, such as airports, luxury hotels, and large-scale entertainment districts, are often built under the assumption that they will attract international visitors. However, uncertainty over actual tourist arrivals can lead to low occupancy rates and underutilized facilities, creating economic inefficiencies. Cuba’s 542-room Selection La Habana luxury hotel opened despite a drop in tourist arrivals from 4.2 million in 2019 to 2.2 million in 2024, raising concerns about overinvestment in high-end infrastructure [13]. Similarly, Australia’s $260 million Gold Coast Airport expansion saw several international routes abandoned within two years due to low demand, leaving much of its new capacity underutilized. These cases reflect the issue where overestimation of international arrivals leads to excess capacity, high maintenance costs, and misallocated resources. Tourism infrastructure often fails to achieve full utilization when demand projections are inflated, creating long-term fiscal burdens on government budgets [14]. Furthermore, tourism-driven employment is often unsustainable. If visitor demands fall short, large-scale developments can become costly burdens and divert funds from essential public services.

Finding a Balance Between State Control and Market Forces

In order to ensure long-term economic stability, governments must transition from aggressive state-led tourism expansion to market-driven sustainable tourism models that regulate visitor flows, encourage private investment, and diversify tourism offerings. Dynamic pricing and visitor caps can help balance tourist inflows with local economic capacity. Amsterdam, for example, has taken significant steps to curb excessive tourism by increasing taxes and visitor limits to protect local economies. In 2023, the city closed its cruise ship terminal to discourage visitors who spend little money locally but strain public resources and infrastructure disproportionately. By doing so, Amsterdam aims to prioritize long-term economic sustainability over short-term visitor surges [16]. While these policies have generated criticism from tourism-dependent businesses, they reflect a growing shift toward quality-driven tourism strategies that seek to optimize revenue per visitor rather than maximizing sheer tourist numbers.

Another key approach is leveraging public-private partnerships to finance tourism infrastructure, reducing the financial burden on governments while ensuring efficient capital allocation. Hong Kong Disneyland serves as an example of a successful public-private tourism investment. Opened in 2005 as a joint venture between the Hong Kong government and The Walt Disney Company, the park was intended to boost the city’s tourism sector and diversify its economy. The Disneyland in Hong Kong has since expanded, welcoming over 6 million visitors each year [17]. This example demonstrates that while governments can facilitate large-scale tourism development, their success depends on accurate demand forecasting, adaptive business models, and sustained private-sector engagement.

Expanding beyond mass tourism models is also essential for long-term economic stability. Alternative tourism strategies, such as eco-tourism and cultural tourism, provide sustainable revenue streams that reduce dependence on overcrowded urban hubs. Costa Rica has positioned itself as a global leader in ecotourism, which promotes responsible traveling that supports conservation and local communities. This approach attracted more travelers while preserving natural ecosystems. Similarly, Portugal’s digital nomad visa program has encouraged long-term stays, ensuring visitor spending without overburdening public services [18]. A balanced approach that incorporates visitor regulation, private-sector investment, and diversified models is the key to ensuring tourism remains an economic asset rather than a liability. Governments must recognize that unchecked mass tourism can strain infrastructure, inflate local costs, and reduce long-term sustainability, while over-reliance on state-led initiatives can lead to misallocated resources and financial inefficiencies.

Conclusion

State-driven tourism initiatives have the potential to generate economic growth, but misaligned investment can lead to inefficiencies that strain local economies or result in wasted resources. Over-tourism inflates housing costs, burdens infrastructure, and creates economic dependence on volatile visitor flows, while under-tourism risks over-investment in projects that fail to attract sufficient demand. Governments must move beyond large-scale, state-led tourism expansion and embrace market-driven strategies that balance growth with long-term sustainability.