Cruise Ships in Grand Harbour
On a peak Saturday in summer, three cruise ships berth in Valletta's Grand Harbour carrying 12,000 passengers and crew who come ashore. Passenger surveys suggest each visitor spends about €60 in the local economy, of which roughly €25 is value added locally as wages and profit; the rest leaks out through imported goods and chain-operator margins. The port charges a landing fee of €5 per passenger, raising €60,000 on such a day. A study commissioned by the local council puts the congestion, waste and air-quality cost imposed on residents at €18 per visitor, and notes that the cost is concentrated on the few weekends when several ships arrive at once, while quieter days have spare capacity in the streets, buses and waste system. Residents' groups want either an €18 landing tax or a hard cap of two ships a day. The shipping lines say they will simply reroute to Sicily.
1. Using the figures, explain why the Saturday outcome is allocatively inefficient, and calculate the external cost and the net local value added.
Read the worked answer
The decision to call is made by the shipping line, which faces the landing fee of €5 per passenger. The cost that call imposes on the rest of Malta is €18 per visitor. The fee is therefore €13 below marginal social cost, so each additional visitor looks cheaper to the decision-maker than it is to society, and more arrive on peak days than is efficient. That is a classic negative externality: marginal private cost below marginal social cost, output above the social optimum.
Magnitudes for the day:
- External cost = 12,000 × €18 = €216,000
- Fees actually collected = 12,000 × €5 = €60,000, so €156,000 of the cost is unpriced
- Local value added = 12,000 × €25 = €300,000
- Net = €300,000 - €216,000 = €84,000
Note that €60 of spending is not €60 of benefit - €35 leaks out. Net is still positive, which shows the issue is not that ships are bad but that too many arrive simultaneously. On a quiet day the marginal external cost is near zero, so the efficient charge is day-specific, not a flat €18.
2. Compare a €18 landing tax with a hard cap of two ships a day.
Read the worked answer
The tax prices the externality and lets the market allocate. Lines with high-value passengers (excursions pre-booked, overnight stays) can still call and absorb the charge; low-value calls drop out. It raises revenue that could compensate residents or fund waste collection, and it can vary by day, matching the fact that the externality is concentrated on peak weekends. The risk is elasticity: if cruise demand for Malta is inelastic, the lines pay and keep coming, so the number of visitors - and the congestion - barely falls, while the government is simply collecting money from an unchanged problem.
The cap guarantees the physical outcome: two ships cannot generate the congestion of three. But it is blunt. Two huge ships may carry more passengers than three small ones, so a ship count is the wrong unit; it allocates by queue or by historical rights rather than by value; it forgoes the €60,000-plus revenue; and it invites lobbying over berth slots.
If the external cost rises sharply once a third ship berths - non-linear congestion - the cap is the safer instrument. If it rises smoothly, a peak-day charge set at marginal external cost dominates. The best design is probably a peak-day charge, with a cap as a backstop.
3. Evaluate the shipping lines' threat to reroute to Sicily.
Read the worked answer
The threat is only credible if the alternative is genuinely close. Sicily has berths, but Valletta is a distinctive stop - a walled Renaissance city reachable on foot from the quay - that competing western Mediterranean ports cannot easily replicate. Passengers booking an itinerary partly for Valletta would notice its removal, so demand for those cruises is likely to be inelastic in the short run.
The threat matters most in the long run and for marginal operators. Itineraries are planned 18-24 months ahead, so a line can quietly drop Malta from a future programme and the loss is invisible until bookings fall. Newer, larger ships need berths of a certain size, and a cap of two ships is a direct constraint on the growth strategy of exactly those lines.
But the threat cannot be taken at face value: a €18 charge on a passenger who spends €60 is 30% of spend, but only a few euros on a cruise fare of several hundred. Absorbing it is cheaper than losing the call. The sensible response is to test the threat rather than assume it - phase the charge in, observe whether call numbers actually fall, and keep the revenue as compensation for residents if they do not.