Over the past decades, tourism development has raised economics, social and environmental issues, particularly for host communities. This paper provides a wide ranging review of the existing literature aimed at underpinning empirical tourism research with a robust economic framework. So far, tourism research has mostly focused on either quantitative or qualitative approaches that lack a strong economic theoretical setting. Most of the literature on resident's welfare analysis concentrates on their attitudes and perceptions without taking explicitly into account their preferences about policy development based on a cost‐benefit assessment. Hence, the purpose of this paper is to draw connections within the current body of research to explain the relationship between residents and tourism activity, as well as consumer theory and economic choice. In this way, it is possible to construct a multidimensional framework that allows one to analyse residents’ welfare in a systematic and more comprehensive manner.