Cost benefit

6 June 2017

In terms of advertising, the dollar value of a baseball team to a city is between $2 million and $5 million per year (Baade and Dye 1988). In addition, it is difficult to separate spending displaced by the stadium versus new spending induced by the stadium in determining the local economic impact of the stadium. Stadium costs can be broken down into annual fixed costs, such as interest and debt amortization, and variable costs, such as utilities and refuse collection. In 1971, the annual total cost of operating a stadium ranged from $1. 3 million to $2. 3 million per year.

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Okner (1974) estimated that in 1971, the city received between $452,000 and $1. 8 million a year from the stadium rental, which covers the stadium’s 241 variable costs. ‘ Because the construction cost of a stadium can exceed $3,000 a seat, most cities finance new stadium construction by increasing either sales taxes, hotel taxes, or sin taxes (Okner 1974; Kraul 1993). The indirect stadium subsidies include the foregone tax receipts because of the tax-exempt status of stadiums and the site taxes. The latter arises because businesses that would have located on the stadium site and paid taxes cannot do so because of the stadium.

The dollar value of the welfare gain generated by the stadium is an important benefit left unexamined in the literature. If there is a difference between a person’s willingness to pay for a ticket to a sporting event and the actual price paid for the ticket, then a positive amount of consumer surplus is generated. Aggregated over all sports fans in the city, this is the total net consumer surplus of the stadium to the city. This represents a benefit of a stadium that has not been explicitly considered in prior studies. THE MODEL To motivate the discussion of the results, consider a city that subsidizes a stadium for ts baseball team.

Once the stadium has been built, the average cost of holding an event declines with attendance, and the annual average cost of stadium events declines with the number of events held in the stadium. These effects are primarily due to the amortization of the fixed cost over attendance and the number of events in the stadium. Further, there is some evidence that stadium services such as trash removal, concessions, and ushering operate with economies of scale from attendance at events (Baim 1988). The stadium is rented to a sports franchise, which acts as a monopolist in setting the ticket prices.

The franchise sets the ticket prices to extract as much rent as it can from the sports fans. In spite of this, some uncaptured rents accrue to the fans. These uncaptured rents are the net consumer surplus, which is the ditterence between what event versus what the fan actually pays. Figure 1 illustrates the sports tan would be willing to pay tor a sporting the problem. The demand curve for baseball is assumed to be characterized as a linear demand curve both games 242 Figure 1: The Demand for Baseball for illustrative purposes and simplicity. 2 The sports franchise tries to maximizes its profits when setting the ticket price (P*).

The area above the equilibrium ticket price and bounded by the linear demand curve is the consumer surplus. Because P* and Q* are the only observed prices and quantities, the upper-ticket price (P) will have to be estimated. This will allow me to calculate the consumer surplus. 243 Ideally, the Hicksian demand curve should be used to calculate the compensating or equivalent variation measures of welfare gains or losses instead of the Marshallian demand curve. However, Willig (1976) and Hausman (1981) suggest methods by which one could calculate the compensating or the equivalent variation from an estimated Marshallian demand curve.

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