(2025) A Level H2 Econs CSQ 2 Suggested Answers Outline (Draft)

CSQ2

2a. Indonesia: (16.11 - 5.89) / 16.11 = 63.4% decrease

Malaysia: (26.10 - 10.07) / 26.10 = 61.4% decrease

Singapore: (19.11 - 6.31) / 19.11 = 67% decrease

Vietnam: (18.01 - 3.66) / 18.01 = 79.7% decrease

Vietnam has the largest relative fall.

2b. Option 1: Size of market

One reason why the recovery of tourism in ASEAN countries was slower than in Western Europe or North America lies in the size of the market. Asian countries reopened their borders much later after the pandemic, so the potential pool of international visitors was smaller. With fewer tourists able to travel into ASEAN destinations, the overall demand for tourism in the region rose at a slower pace compared to Western economies that reopened earlier and could capture pent-up travel demand sooner.

Option 2: Price of related goods

Another possible reason relates to the price of related goods, such as air travel. Airfare is a complementary good to tourism, and long-haul flights from major tourist markets like Europe or the US to Southeast Asia are significantly more expensive than short-haul flights within Europe or North America. Higher flight costs reduce the overall affordability of travel to ASEAN countries, leading to weaker demand relative to destinations closer to tourists’ home regions.

Option 3: Changing tastes and preferences

Changing tastes and preferences may also play a role. Growing environmental awareness has made some consumers more conscious of the carbon footprint of long-haul flights. As travel to ASEAN typically involves longer journeys with higher emissions, more environmentally conscious travellers may prefer shorter regional trips within Europe or North America. This shift in consumer preferences further dampened demand for long-haul tourism to ASEAN economies.

2c. Carbon emissions from air travel create negative externalities because they impose costs on third parties who are not directly involved in the transaction. These include environmental damage, global warming, and health costs from pollution, which are borne by society rather than by the airline or the passenger. As a result, the marginal social cost (MSC) of air travel exceeds the marginal private cost (MPC).

In a free market, airlines produce and consumers purchase air travel based on private costs and benefits, resulting in an equilibrium output of Qₘ, where MPB = MPC. However, the socially optimal output should be Qₛ, where MSB = MSC. Since Qₘ > Qₛ, too many flights are taken, leading to an over-allocation of resources to air travel and a welfare loss to society.

Television programmes can help correct this market failure by educating consumers about the environmental impact of flying, making the negative externalities more salient. By influencing perceptions and attitudes, they reduce consumers’ willingness to travel by air, thereby shifting the marginal private benefit (MPB) curve leftward. This lowers equilibrium quantity toward the socially optimal level, reducing the welfare loss.

2d. The size of the multiplier (k) can be calculated using the formula

k = 1/mpw or k = 1/1-mpc

where MPC is the marginal propensity to consume, and MPW (marginal propensity to withdraw) is the sum of MPS + MPT + MPM  (the marginal propensities to save, tax, and import respectively)

In the case of a village-based project, the marginal propensity to import (MPM) is likely to be lower than that of the overall country. This is because villagers tend to source goods and services locally, such as food, labour, and materials, rather than relying on imported inputs. As a result, a smaller proportion of income earned within the village leaks out through imports.

With a smaller MPM, the MPW is lower, and since k=1/MPW, the multiplier value for the village will be larger than that of the nation as a whole. This means that each dollar of initial tourist spending in a village creates a greater multiplied impact on local income and output compared to the national average, as more of the spending circulates within the local economy rather than leaking abroad.

2e. The main objective of imposing a tax on international tourists is to internalise the external costs arising from over-tourism, such as congestion (affecting commuters), noise (affects resident), and environmental degradation (harms to health). By placing a tax on tourists, governments aim to make visitors bear part of the external cost they impose on the host country. This can be shown as a leftward shift of the MPC (marginal private cost) curve by the value of the marginal external cost (MEC), aligning it with the MSC (marginal social cost). This correction brings the market equilibrium output down from the over-consumed level Qₘ to the socially optimal level Qₛ, thereby improving allocative efficiency.

While this seems to address the market failure conceptually, there are two main problems to consider.
First, not all tourist activities generate significant negative externalities. For instance, small-scale cultural tourism or eco-tourism projects may have minimal environmental impact. A blanket tourist tax applied to all visitors fails to differentiate between harmful and harmless activities, making it an imprecise policy instrument.

Second, tourism also brings important macroeconomic benefits. Higher tourist spending increases net exports (X–M), boosting aggregate demand (AD) and generating positive multiplier effects that raise real national income and employment. By discouraging tourism through higher prices, such a tax could reduce these benefits, leading to slower growth and higher unemployment in economies heavily reliant on the tourism sector.

As an alternative, governments could adopt direct legislation or targeted interventions to reduce harmful externalities more effectively for example, enforcing rules on noise levels, limiting visitor numbers at sensitive sites, or penalising unruly tourist behaviour. Such measures can mitigate the negative side effects of tourism while preserving its contribution to growth and employment.

f. A low-income ASEAN country planning to attract more international tourists must carefully consider whether such a move would bring net benefits to the economy and society as a whole. While tourism can generate growth and employment, it may also strain limited resources and create negative side effects. The government therefore needs to evaluate the benefits, costs, constraints, and unintended consequences before deciding whether the plan would be truly beneficial.

Benefits
Tourism is a major source of foreign exchange earnings and contributes directly to aggregate demand (AD) through higher spending on goods and services such as accommodation, food, and transport. Increased tourist arrivals can create a strong multiplier effect, generating employment, raising household incomes, and stimulating growth in related industries like retail and construction. For a low-income country, the development of tourism also promotes economic diversification, reducing reliance on primary commodities and offering a pathway to structural transformation. In the long run, improved infrastructure, greater international exposure, and skill development in the service sector can enhance overall productivity and competitiveness.

Costs
However, attracting more tourists involves significant economic and opportunity costs. Governments may need to invest heavily in tourism infrastructure such as airports, roads, and utilities and in marketing, safety measures, and workforce training. These require substantial public expenditure, which could lead to budget deficits or higher public debt. Moreover, funds allocated to tourism might come at the expense of other essential sectors like education, healthcare, or poverty reduction. There is also the risk of economic vulnerability, as excessive dependence on tourism makes the economy more exposed to global shocks such as pandemics or natural disasters that can sharply reduce visitor numbers.

Constraints
A low-income ASEAN country also faces resource and institutional constraints. Fiscal capacity may be limited, reducing the ability to sustain large-scale tourism investments. Domestic infrastructure may be underdeveloped, and the local workforce might lack the necessary skills to provide high-quality services. Administrative weaknesses or corruption could further undermine effective planning and regulation. These constraints mean that even if the tourism potential is high, the country may struggle to translate it into sustainable and inclusive growth without strong governance and public–private partnerships.

Unintended Consequences
Rapid expansion of tourism can also generate negative externalities. Increased visitor numbers may lead to congestion, pollution, and degradation of natural habitats such as beaches, forests, and coral reefs. Over-tourism can erode cultural traditions and increase the cost of living for local residents. Furthermore, if much of the industry is foreign-owned or reliant on imported goods, a large share of revenue may leak out of the domestic economy, reducing the actual benefit to local communities and worsening income inequality. Without careful regulation, the environmental and social costs could outweigh the economic gains.

Conclusion
Ultimately, while expanding international tourism offers clear economic advantages for a low-income ASEAN country, the overall benefit depends on how well the government manages these costs, constraints, and externalities. Policies that promote sustainable tourism, ensure local participation, and protect the environment will be essential in ensuring that tourism growth contributes to long-term welfare rather than short-term gains.