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Abstract
Helping to sustain a viable rural sector, rural tourism enjoys public support in many countries. We claim that due to club-good and agglomeration externalities in the rural accommodation market, public support should be integrated in a broader local development policy that regulates the number of accommodation units in a locality. To demonstrate this we extended an equilibrium model that accounts for product differentiation and oligopolistic competition to address club-good and agglomeration effects and applied it to data collected in north Israel. We show that under the prevailing regulation, the number of units is by far higher than the social optimum.