Countries encourage tourism to make money. The same goes for local governments, tourism industry associations and tour firms. Some places provide options for low-spending tourists like backpackers, despite not making much money from them. These options may be cheap campsites, backpacker hostels, allowing hitchhiking and work-travel visas. At first sight, any positive revenue from poorer tourists would justify welcoming them. This simple revenue calculation, however, neglects the substitution effect and dynamic demand.
Substitution means that if cheaper travel options are available, then some tourists who would have spent more in the absence of these options now spend less. For example, a person who would stay in a hotel if there was no other accommodation, stays in a backpacker hostel instead. On the other hand, if all options are expensive, then the poorest tourists do not come at all. There is a tradeoff between the number of tourists and the average tourist’s spending. If introducing cheaper options leads to many tourists switching to these, but does not attract many additional low-spending people, then creating these cheaper options reduces total profit.
Dynamic demand means that a person who has toured a particular location once changes his or her likelihood of going there in the future. For example, having seen a tourist site, a person does not visit it again. Or someone going on vacation and liking the location starts going there year after year. If a region encourages young, low-income people to visit as backpackers, then it may increase or decrease future visits by these people when they are older and wealthier. In particular, if people do not tour the same location again (and spend more when older), then encouraging them to visit when young reduces the total profit from them over their lifetime.
The fact that some regions welcome backpackers has several possible explanations. There may not be much substitution, or a visit may increase future visits. The tourism industry may not have thought this through and may be reducing their own profit inadvertently. Or the government may have other objectives than taxes from the tourism industry. For example, allowing people from other countries to visit cheaply may make these people friendly to the host country, which may yield some nonmonetary benefit in international relations.