Welcome to Some Sports Economics, a six-part video series explaining economic concepts through sport, by La Trobe University senior lecturer, Liam Lenten.
In the sixth and final part of this series, Liam looks at some of the reasons why governments choose to invest money in sports.
You can watch Liam explain the video.
Or read through the transcript below.
In assessing the use of taxpayer’s funds in, let’s say, bidding for a major event (and financing it if successful), or building a new stadium, or even trying to secure a new license for a sports team, it helps to start with the basics. Public sector subsidies (in any sector, not just sport) involve both pros and cons. This is where the tool of cost-benefit analysis becomes handy. Remember, you may be a sports fan, but you’re also a taxpayer!
As for the benefits of having a team, event or facilities (let’s say the latter), without public facilities for professional sport, privately built facilities will develop if (and only if) team owners expect profits – that is, if net expenditure by fans on tickets and (if you recall clip 3) complementarities exceeds the cost of building and maintenance (and the pressure to maximise profit helps keep expenditures in check). However, this is not usually the case, and this apparent ‘market failure’ is often used by sports industry advocates as a justification for public sector involvement in building the stadium, and so if the local government decides to build it anyway (maybe they see it as a public good), team owners certainly won’t argue with that – they’ll simply agree to be a tenant.
Is a stadium a worthwhile investment for a city? The City’s revenue is sourced mostly from the rent paid by tenants (that is, the teams) – that could be a percentage of gross or flat fee plus maybe a share of revenue from complementarities. Though, evidence from professional sports in North America is that teams invariably receive highly favourable lease agreements – in many cases, no rent or token rent (say, $1) is paid, but it’s often linked to attendance, usually it’s less than 10% of ticket sales. On the costs side: we have construction, depreciation and (if you borrow) interest. Also, think of opportunity cost – what else could have been done with those funds to improve other public facilities that (even if not as popular electorally) might have produced better social outcomes, such as roads, schools, hospitals?
If profit is not possible, that doesn’t necessarily mean that government shouldn’t use your taxes to build it, but why then do governments subsidise sports teams and events? The answer is found in our concept here: the city considers both direct and indirect costs and benefits, whereas the private sector ignores the latter.
Let’s break this down. Direct benefits? Most are obvious, but question marks could be appended to most (or just about all) of them. So you can talk about new spending by fans, or in a regional context – for example, the Gold Coast AFL team: net exports (you increase exports of games to non-local fans; and reducing imports of games in Brisbane). But is expenditure really new or just a substitute for other local entertainment? Consider how Hollywood had a bumper last quarter of 1994, coinciding with the MLB players’ strike. Or talk about the expenditure of the coach and players – after all, they live locally. Another wet blanket here is that fundamentally, sports teams and events are relatively small businesses.
Now, indirect – what the city also considers, costs and benefits on third parties (alternatively negative and positive externalities). Negative: things like congestion, noise and crime, but even then, it might be socially optimal to merely reduce the number of games, not eliminate them. Positive: this is the so-called ‘social impact’ of the event or team, giving a sense of identity as locals, also attracting people from all over the world (which can be used for future tourism marketing), but partially offset by locals leaving? Boosters also talk about ‘multiplier’ effects. Moreover, there’s the argument that it attracts other business, but there’s little (if any) evidence of this!
Politicians believe (or at least try to convince the public) that positive externalities easily outweigh the negative, invoking the wonderful (if over-used) quote from the motion picture Field of Dreams: “Build it, and they will come”! Nevertheless, on balance, the general consensus of Sports Economists is that governments tend to over-spend on sports, but to properly discuss the political considerations would require a whole other series of videos.
Anyway, the final whistle has been blown on this video series, so we’ll leave our coverage there. I hope you have enjoyed this take on some of the sport industry’s greatest mysteries, and that you’ve learnt a bit of Economics along the way, too! In the meanwhile, think economically –it may just help you win. I’m Liam Lenten, farewell for now.
Watch previous videos from Some Sports Economics:
When scoring an own-goal is the only way to win (VIDEO)
Full versus half-full stadiums in maximising profits (VIDEO)
The economics behind inelastic ticket pricing (VIDEO)
The economics of comparative advantage and Usain Bolt (VIDEO)