An optimal size for rural tourism villages with agglomeration and congestion effects

Helping to sustain a viable rural sector, rural tourism enjoys public support in many countries. We claim that due to congestion and agglomeration externalities in the rural accommodation market, public support should be integrated into a broader local development policy that regulates the number of accommodation units in one locality. To demonstrate this, we extended an equilibrium model that accounts for product differentiation and oligopolistic competition to address congestion and agglomeration effects, and applied it to data collected in northern Israel. We show that, under the prevailing policy measures, the number of accommodation units can exceed the optimal one, leading to loss of welfare.