Why is Iceland so expensive: An exploration of costs and factors influencing price

ByEric Wilson Updated

Why Is Iceland So Expensive?

Iceland is expensive for several reasons.

One factor is the small market and oligopoly, where two companies dominate the shipping, air cargo, grocery, and gas station industries, leading to limited competition.

Additionally, Iceland’s reliance on imports due to its geographical isolation results in higher prices.

The country also imposes high import taxes and tolls to support local production and maintain infrastructure.

Despite the high cost of living, Iceland offers higher salaries and a relatively high purchasing power.

Tourists can save money by shopping at low-cost grocery stores.

Key Points:

  • Iceland is expensive due to a small market and limited competition in several industries.
  • Geographical isolation leads to reliance on imports and higher prices.
  • High import taxes and tolls support local production and maintain infrastructure.
  • Despite the high cost of living, Iceland offers higher salaries and purchasing power.
  • Tourists can save money by shopping at low-cost grocery stores.
  • Two dominant companies control shipping, air cargo, grocery, and gas station industries, contributing to the limited competition.

Did You Know?

1. In Iceland, the high cost of transportation contributes to the overall expensive price tag. Most goods and products are imported from other countries, which involves extensive travel distances and logistical challenges, adding to the final price consumers pay.

2. One reason for the expensive nature of Iceland is its remote location. Located in the North Atlantic, Iceland’s isolation increases the shipping costs for imported goods and raw materials, making them more expensive for consumers.

3. Iceland’s unique environmental conditions also impact the cost of living. Due to the country’s harsh climate and limited resources, agriculture is challenging and requires advanced technology and techniques. This, in turn, affects the availability and cost of locally produced food items.

4. Another contributing factor to Iceland’s high prices is its relatively small population. With just over 360,000 residents, the customer base for businesses is limited. To compensate for lower demand, businesses often raise prices to maintain profitability.

5. Despite the expensive nature of Iceland, tap water is surprisingly one of the most affordable aspects of daily life. The country boasts an abundance of natural springs, resulting in an abundance of clean and pure tap water, eliminating the need for expensive bottled water.

Factors Behind Iceland’s High Prices

Iceland is known for its high cost of living compared to other countries. There are several factors that contribute to this, one of which is the relatively high average salary in Iceland. With higher wages, people have more purchasing power, but this also means that prices of goods and services are generally higher.

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Another reason for the high prices is the small market size in Iceland. The population is relatively small, which makes it less attractive for global companies to establish a strong presence. As a result, there is limited competition, especially in sectors such as shipping, air cargo transport, grocery stores, and gas stations.

Additionally, Iceland’s geographical isolation and reliance on imports contribute to the high prices. Being an island nation, most goods need to be imported, which incurs additional costs such as transportation fees and import taxes. The government levies high taxes on imports to support local production and maintain a strong infrastructure.

Despite these high prices, Iceland has relatively lower energy costs. Electricity, water, and geothermal power are relatively cheap due to the country’s abundant natural resources. However, this does not offset the overall high cost of living in Iceland.

Impact of Limited Competition on Prices in Iceland

Limited competition is a significant factor in the high prices observed in Iceland. In sectors such as shipping and air cargo transport, only two companies dominate the market, leading to an absence of healthy competition. This lack of competition allows these companies to maintain higher prices, as there are fewer alternative options for consumers.

A similar situation exists in the grocery store and gas station industry in Iceland. Most of these establishments are owned by two main companies, which results in limited competition among them. It is worth noting that Costco, as the main competitor, has entered the Icelandic market and has provided some alternative options for consumers.

The oligopoly in these sectors creates a challenging environment for new businesses to enter and disrupt the market. The limited competition restricts choices for consumers and contributes to the overall high prices observed in Iceland.

Effects of High Import Taxes and Tolls on Cost of Living

Iceland’s expensive cost of living is influenced by high import taxes and tolls. These taxes are imposed due to Iceland’s small market size and population, with the government aiming to support local production and maintain infrastructure.

The reliance on imports also drives up prices. As an island nation, Iceland imports most goods, including everyday consumer products and raw materials for industries. The transportation costs, such as shipping fees and customs duties, contribute to the final price of these imported goods.

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Furthermore, the high import taxes and tolls restrict the entry of foreign goods into the market, limiting the availability of a wide variety of products to consumers. This, combined with limited competition, contributes to the overall high cost of living in Iceland.

Influence of Tourism on Housing Prices in Iceland

Tourism has significantly impacted housing prices in Iceland, especially in recent years. The rise of platforms like Airbnb has provided an alternative accommodation option for tourists, causing a surge in demand for housing. Consequently, the available housing supply for locals has decreased, resulting in an increase in prices.

The explosion of Airbnb rentals has directly impacted the housing market, leading to a decline in housing supply and a rise in prices. To address this issue, the Icelandic government has implemented regulations to restrict short-term rentals. They have set a maximum of 90 days per year for Airbnb rentals and imposed higher taxes on those who exceed this limit.

Additionally, the COVID-19 pandemic has also affected housing prices in Iceland. With a decline in tourism, the demand for short-term rentals has drastically decreased. This unexpected change has temporarily lowered rental housing prices after years of steep increases.

  • The rise of Airbnb and other platforms has led to an increase in tourist demand for housing.
  • Local housing supply has decreased due to the popularity of short-term rentals.
  • The government has implemented regulations, such as a maximum of 90 days per year for Airbnb rentals, to address this issue and reduce the impact on housing prices.
  • The COVID-19 pandemic has caused a decline in tourism, resulting in a decrease in short-term rental demand and temporarily lower housing prices.

Strategies for Saving Money in Iceland

Given the high cost of living in Iceland, it is essential to find ways to save money. Here are some strategies that can help:

  • Shop at low-cost grocery stores: Instead of expensive convenience stores, consider shopping at budget-friendly options like Bónus and Krónan.

  • Cook your meals: Eating out can be costly, so preparing your meals can significantly reduce expenses. Try buying local ingredients and cooking traditional Icelandic dishes.

  • Take advantage of free attractions: Iceland has numerous natural wonders that are free to explore. Take advantage of these attractions instead of participating in expensive tourist activities.

  • Opt for budget accommodation: Instead of luxury hotels, consider budget accommodations such as guesthouses or hostels. This can significantly reduce accommodation expenses.

  • Use public transportation: Iceland has a reliable public transportation system, especially in major cities like Reykjavik. Utilizing buses or shared rides can be cheaper than renting a car.

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By implementing these strategies, visitors and residents alike can mitigate the high costs associated with living or traveling in Iceland.

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Frequently Asked Questions

Is it really expensive to go to Iceland?

Yes, Iceland is known to be quite expensive. In fact, it ranks among the top expensive countries I have visited, alongside Sweden and Australia. Although there are a few countries like Norway and Switzerland that may be slightly pricier, Iceland still stands as one of the most costly destinations to travel to.

Is Iceland expensive for Indian?

Yes, Iceland can be considered expensive for Indians. The average cost of living in Iceland is significantly higher compared to India, with a notable difference of 459%. Iceland ranks as the 5th most expensive country globally, while India ranks 189th. Although the average after-tax salary in Iceland is slightly higher, it still only covers living expenses for approximately 1.5 months, compared to 1.3 months in India. Therefore, it is important for Indians to consider the higher cost of living when planning a visit or relocation to Iceland.

Is Iceland more expensive than USA?

When comparing the cost of living between Iceland and the USA, it is generally considered that Iceland is more expensive. However, this does not tell the whole story. While overall costs may be higher in Iceland, rental expenses are actually lower compared to the US. So, when comparing the two countries economically, it becomes clear that there are advantages and disadvantages to living in both places in terms of affordability.

What is so special about Iceland?

What sets Iceland apart is its extraordinary natural beauty shaped by the dramatic interplay between fire and ice. This small island country is renowned for its stunning contrasts, boasting vast glaciers and highly active volcanoes. These opposing forces have carved out a unique landscape that captures the imagination of visitors. With its unparalleled mix of icy glaciers and fiery volcanoes, Iceland stands out as a captivating destination that mesmerizes travelers from around the world.

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