Similar to Copeland and Taylor (1999), we consider that one industry produces an environmentally sensitive agricultural good which is produced by labor. Another is tourism which is managed by labor and industry-specific capital. On the other hand, similar to Beladi et al. (2007), we assume that tourism generates pollution which causes negative externalities in the productivity of agricultural goods. Agricultural goods are assumed to be tradable while touristic service is non-tradable and should be consumed within this region. We focus on the policies which are widely accepted by the governments intending to contribute to regional development. We analyze the effects of external labor or capital on the economic welfare of native inhabitants. Note that immigrants’ consumption will constitute the local demand in this area while we assume total income of foreign capital will be remitted by agricultural goods.
Different from the ordinary results obtained by similar two-factor two-good models which insist that either immigration or capital inflow is essentially beneficial, we find that immigration reduces the economic welfare of native inhabitants in any case. Moreover, when total capital endowment increases due to foreign capital, dominating defeated and expelled domestic local capital in magnitude, we find that the economic welfare of natives also decreases. We assert that there are two negative effects, the effect on the agricultural sector caused by the expansion of tourism and the negative effect on domestic demand caused by remittance of foreign capital owners, dominate the ordinary positive effect of economic extension.