Download Sports Economics May 4500 Chapter 10

Sports Economics
May 4500
Chapter 10 - Answers
Review Questions
1.
Define external benefit. What distinguishes the two types of external benefits that sports teams
produce? Give examples of each.
Answer: An external benefit is a benefit accrued by one party without that party paying the other
party for the benefit. In sports, external benefits can be measurable economic activity that occurs
in relation to the existence of the team (for example tv sports channel shows), or they be realized
as civic price, or commonality for fans of a given team. This may be categorized as quality of life
benefits (for example the price North Texas residents felt when the Mavericks won the NBA
championship)
2.
Describe external benefit inefficiency. How can it be remedied?
Answer: External benefit inefficiency arises because a good that is privately provided will not be
provided in the quantity most demanded by society. The external benefit, because the private
party cannot collect for it, will not provide the socially optimal level of the good. Instead, the
private party provides the quantity for which private marginal cost equals private marginal
benefit, even though social marginal benefit would require additional units produced. External
benefit inefficiency can be remedied using taxes or subsidies so that owners have an incentive to
take into account the social benefit of the good provided.
Thought Problems
1. Is it efficient to subsidize team owners for the benefit of a small proportion of taxpayers who are
sports fans? Is it fair?
Answer: Efficiency means, essentially, getting social costs and benefits equal to each other at the
margin. If there are external benefits to sports teams, then theory suggests that social benefits
exceed social costs on additional output (admissions in the short run, team quality in the long
run). Owners won't produce some units that are valued at more than their cost by fans because
owners can't collect those values. Subsidies can work to overcome this result, but the subsidy
must be tied to actual attendance choices by team owners. Otherwise, they are just a payment
that does not increase output for fans. The graph of externality situations are useful to help
illustrate.
Fairness is in the eye of the beholder and members of the community are perfectly within their
rights to think that it is unfair to subsidize billionaires.
2. Explain how a new stadium might enhance the competitiveness of a particular team. Be very
careful to state the particulars of the situation where this can happen.
Answer: From the text, new stadium revenues will only enhance a team's competitiveness if the
owner would spend the increased revenues from the new stadium on higher quality players. This
could happen for a couple of reasons. The owner could have wished all along to increase quality
but for short-run investment difficulties. A new stadium could give the revenue infusion needed
to increase quality and profits. Or fan demand for quality could have increased over the period of
new stadium construction so that the owner would make higher profits after the stadium was
built by increasing quality. Short of this, pouring new stadium revenues into a higher quality team
would not raise profits and we would expect profit-maximizing owners to just pocket them.
5.
If a subsidy is justified on external benefit grounds, is any size subsidy justified? Discuss the size of
a subsidy in terms of the definition of a minimum subsidy. Would you expect owners to try to
obtain larger than minimum subsidies? Why? Why might they be successful?
Answer: The subsidy that would make fans happiest would be the smallest possible subsidy that
would keep the owner in town. Even though buyers' surpluses might be larger than that, it is this
minimum subsidy that leaves fans with as much left-over surplus as possible. From this
perspective, a larger subsidy reduces fan welfare, even though owners are happier but a larger
subsidy cannot be justified on the grounds of fan welfare. If owners know that there are left-over
buyers' surpluses after the subsidy, and if it is difficult to determine the minimum subsidy,
economic intuition would suggest that owners would try to extract a subsidy that is larger than
the minimum. Owners are the ones with all of the information about the sizes of their losses and
they have no incentive to tell anybody and reduce their potential subsidy.
12.
Why is it less likely that new economic activity will accompany a subsidy to keep a team that
already exists compared with a subsidy use dot lure a brand new team?
Answer: If the team is already there, the only new activity has to be over and above what already
existed prior to the subsidy. Since residents already would be spending substantial amounts, new
economic activity would be hard to come by.