Externalities of Excess

Evaluating the economic benefits and costs of tourism in European cities

In a world where being well travelled is highly respected, and having the privilege to visit new places and explore the world is highly coveted, one would assume that the same level of esteem would be extended to tourists, however more often than not that isn’t the case. Recent spikes in tourism have sparked resentment and frustration towards tourists stemming from their intrusion into local spaces, and the consequent impact on local economies and environment due to overtourism. Overtourism is a term that serves to describe the situation in which the impact of tourism, at certain times and in certain locations, exceeds physical, ecological, social, economic, psychological, and/or political capacity thresholds. (Vagena) It has become one of the most important debates in contemporary European policy. While tourism is an integral component of Europe’s economic systems, the increasing number of visitor inflows to cities like Barcelona, Venice, Florence, and Amsterdam has pushed local systems to their limits. While tourism undeniably helps garner economic growth, fosters job creation, and enhances cultural exchange, overtourism presents complex economic, social, and environmental costs that challenge the long-term development of these cities.

Tourism is frequently defended through its significant contribution to local and national economies. Tourism stimulates spending across accommodation, transport, food services, museums, and retail, generating a high multiplier effect that circulates money throughout urban economies. Many European cities rely on tourism as a core pillar of economic growth, helping maintain competitive GDP levels and supporting public revenue. Before the pandemic tourism directly accounted for roughly 4–4.4% of GDP and around 6–7% of employment in OECD countries; (OECD) and it also fueled service exports and local business revenues. These inflows fund restaurants, hotels, transport, and many small firms, showing tourism’s large contribution to national and local income. For example, according to data from 2023 Italy’s travel & tourism sector contributed €215BN, representing 10.5% of Italy’s total economic output for that year, thus highlighting a significant impact. (World) Additionally, from a macroeconomic perspective, tourism promotes economic diversification and stimulates industries like construction, events, entertainment, and transportation.

The economic value of tourism, however, becomes problematic when evaluated through the lens of negative externalities. Negative externalities are defined as occurring when the product and/or consumption of a good or service exerts a negative effect on a third party independent of the transaction. (Loo) In the case of overtourism, these include environmental degradation due to pollution from cruise ships and airplanes; overburdened infrastructure such as transit systems and waste management; and high maintenance costs for heritage sites. Tourism-related emissions account for nearly 22% of global transport emissions, as depicted in the graph below.

For example, Venice attracts around 20 million tourists annually and over 50,000 per day during peak season, a number that greatly exceeds its dwindling resident population of just over 50,000. (Bolen) While tourism generates a revenue of around 2 billion euros annually in Venice, this economic benefit is offset by a significant environmental cost, as the city has witnessed a 50cm rise in sea levels. (Hardy)

However, one of the strongest economic justifications for tourism in major European cities is its capacity to generate employment across a wide spectrum of skill levels. Tourism is a highly labour-intensive industry, supporting jobs in housing, food services, transport, cultural institutions and event management. This is corroborated by the statistic that tourism contributes to approximately 10% of total employment in the European Union, (European Commission) with particularly high concentrations in urban destinations such as Paris, Rome and Barcelona. Unlike sectors that rely on experience and capital, tourism offers relatively accessible entry-level work, making it especially important for young people, migrants, and low-skill workers. Tourism also plays a crucial role in sustaining small and medium-sized enterprises (SMEs), which form the backbone of Europe’s tourism economy. Over 80% of EU tourism businesses are SMEs, (UN Tourism) including family-owned restaurants, boutique hotels and souvenir shops. A large tourist presence in popular city centres allows these businesses to remain financially lucrative, often sustaining livelihood for many residents. Through this combination of employment creation and SME support, tourism contributes not only to income generation, thus increasing the purchasing power of individual residents and improving their overall quality of life.

However, despite its capacity to create job opportunities, the tourism sector in major European cities is widely criticised due to seasonal employment, low wages, and thus job insecurity. According to the International Labour Organization, a significant percentage of tourism jobs fall into temporary, part-time, or informal categories, with limited access to long-term contracts, health benefits, or career progression (ILO). In cities such as Venice, Barcelona, and Paris, demand fluctuates sharply between peak and off seasons, producing inconsistent income cycles for workers who are often forced to seek secondary employment during the low tourism months. The COVID-19 pandemic further exposed this vulnerability, where tourism-dependent cities experienced sharply rising rates of unemployment, clearly depicting how fragile tourism-heavy labour markets can be when demand falls. Thus, this instability undermines tourism’s role as a reliable source of long-term economic security and income.

Overtourism also indirectly impacts local labour markets by inflating housing costs and displacing essential workers from city centres. As tourism demand rises, permanent residential housing is constantly converted into short-term rentals, reducing housing opportunities and skyrocketing prices for workers, teachers, healthcare staff, and service employees who are essential to the functioning of the urban economy. For example, house prices in the EU have increased by up to 60% on average since 2015, with some member states seeing rises of over 200%, with the greatest increase in popular tourist cities like Lisbon, Barcelona, Madrid and Milan, as depicted in the graph below. (European Council)

This creates a housing inequality, forcing workers to commute from distant suburbs, increasing living costs and reducing quality of life. As a result, while tourism appears to generate employment on paper, it simultaneously erodes the living conditions that make sustained employment possible, creating a contradiction in which the very workers who support the tourism economy are increasingly unable to afford to live within it.

One of the most widely celebrated non-economic benefits of tourism in major European cities is its ability to foster cultural exchange and mutual understanding. Through travel, visitors are exposed to new languages, cuisines, histories, artistic traditions, and social norms, while local host communities gain opportunities to share their local customs on a global stage. Major cities such as Paris, Rome, Florence, and Barcelona attract tourists primarily because of their cultural capital, such as architecture, museums, art and cuisine. Tourist spending plays a crucial role in sustaining these cultural institutions, as entrance fees and visitor donations help finance museums, galleries and historic monuments that might otherwise struggle for public funding on their own. In this sense, tourism acts as a mechanism for preserving and circulating Europe’s cultural heritage.

However, when tourism scales beyond sustainable levels, cultural exchange increasingly gives way to cultural homogenisation and commodification. Rather than supporting authentic local life, overtourism often changes their real culture to cater almost exclusively to tourist preferences. Historic neighbourhoods become dominated by souvenir shops, fast-food chains and themed bars,while everyday services for residents such as grocery stores, schools, and community spaces gradually dwindle. As a result, many European city centres begin to resemble one another: the same cafés, the same branded merchandise and the same “Instagrammable” aesthetics. Festivals are rescheduled for peak tourist seasons, local food traditions are altered to suit foreign tastes, and neighbourhood rituals are turned into spectacles. Scholars describe this process as the creation of “staged authenticity,” where culture is no longer lived organically but curated for economic extraction. In cities such as Barcelona, Venice, and Prague, residents increasingly protest that their homes are being transformed into theme parks, evidenced by the popular “Tourist go home!” protests. This homogenisation weakens the uniqueness that initially made these places attractive, transforming living cities into commercialised tourist attractions.

In conclusion, while tourism has undeniable benefits for Europe in the form of economic growth, job opportunities and cultural exchange through globalisation, it has several drawbacks when pushed past a certain point. Overtourism has had severe negative externalities on major European cities such as housing price inflation, environmental degradation, cultural erosion and income instability that are quickly beginning to outweigh these gains. These cities must adopt sustainable tourism models such as regulating short-term rentals, capping visitor numbers, and re-centering policy around residents rather than tourists. Only by internalizing the external costs of tourism can cities ensure that tourism contributes to long-term sustainable economic growth rather than undermining it.

Works Cited

Bolen, Heather. “Travel & Culture Salon.” Travel & Culture Salon, Oct. 2024, https://doi.org/103888279/Cruise%2BShip%2BVenice.

European Commission. “Overview of EU Tourism Policy.” Mobility and Transport, 2023, transport.ec.europa.eu/tourism/overview-eu-tourism-policy_en.

European Council. “The EU’s Housing Crisis.” Consilium, 2019, www.consilium.europa.eu/en/policies/housing-crisis/.

Hardy, Paula. “Sinking City: How Venice Is Managing Europe’s Worst Tourism Crisis.” The Guardian, The Guardian, 30 Apr. 2019, www.theguardian.com/cities/2019/apr/30/sinking-city-how-venice-is-managing-europes-worst-tourism-crisis.

ILO. NON-STANDARD EMPLOYMENT around the WORLD Understanding Challenges, Shaping Prospects OVERVIEW. www.ilo.org/sites/default/files/wcmsp5/groups/public/@dgreports/@dcomm/@publ/documents/publication/wcms_534496.pdf.

Loo, Andrew. “Negative Externalities.” Corporate Finance Institute, 8 Mar. 2023, corporatefinanceinstitute.com/resources/economics/negative-externalities/.

OECD. “OECD Tourism Trends and Policies, 2010.” Choice Reviews Online, vol. 48, no. 01, Sept. 2020, pp. 48-005548-0055, https://doi.org/10.5860/choice.48-0055.

UN Tourism. “UNWTO Launches Digital Futures Programme for SMEs.” Untourism.int, 2022, www.untourism.int/news/unwto-launches-digital-futures-programme-for-smes.

Vagena, Akrivi. “OVERTOURISM: Definition and Impact.” Academia Letters, June 2021, https://doi.org/10.20935/al1207.

World. “Travel & Tourism Injected €215BN into Italy’s Economy.” Wttc.org, World Travel & Tourism Council, 2 May 2024, wttc.org/news/travel-and-tourism-injected-215-euros-bn-into-italys-economy.