A note for the rugby union and the government

In the current issue of Econ Jounal Watch Dennis Coates and Brad Humphreys ask Do Economists Reach a Conclusion on Subsidies for Sports Franchises, Stadiums, and Mega-Events? (pdf). The answer is yes, and economits are opposed to such subsidies. 

The, lengthy, abstract/introduction to their paper reads

State and local governments in the United States have long been called upon to subsidize the construction of stadiums and arenas. Indeed, the first wave of government subsidization dates to the years between 1917 and 1926, the first boom in stadium construction. Since then, one thing that has changed substantially is the rationale for public-sector support. In 1926, The Playground said the goal was for “the stadium to have as broad a use as possible.” It recommended the once-familiar horseshoe shape because it facilitated egress via the open end and included a long straightaway suitable for a procession. The implicit rationale was for the facility to serve the broad public interest by hosting pageants, parades, rallies, and festivals, as well as sporting contests of all sorts from track and field to football and baseball. Today, stadium subsidization focuses on a single use, namely, hosting professional sports franchises, which usually have substantial control over the facilities’ availability for other events.

The change from public provision of venues available for a wide array of events to public subsidization of largely privately controlled facilities is a fairly recent phenomenon. The change occurred gradually. The first steps may have occurred with baseball-franchise relocations –the Braves’ relocation in 1953 from Boston to Milwaukee, the Browns in 1954 from St. Louis to Baltimore, and the Athletics in 1955 from Philadelphia to Kansas City. In each case, new or recently renovated publicly owned facilities were made available to baseball franchises on quite generous terms. For example, The New York Times reported on March 15, 1953 that the Braves were offered a flat rental of $1,000 for the first two years on the new County Stadium in Milwaukee.

Ralph Wulz (1957) argued that public ownership of stadiums was justified if “private enterprise could not provide the service which the public demanded and at the same time realize an adequate profit on its investment.” However, Wulz did not foresee private businesses being subsidized in their use of these facilities, stating that subsidization might be suitable for “governmental activities and perhaps activities at which no admission is charged,” but that “commercial type activities pay the full cost of the services or facilities which are provided” .

Wulz’s (1957) discussion raises the question of the possible theoretical justification for the subsidies we see today. Subsidies can, in general, be justified either on efficiency or distributive grounds. For example, a subsidy could be justified if the unsubsidized market would supply too little of the good. This is the classic situation of positive externalities. The subsidy would induce greater provision. Alternatively, subsidies could be justified as a means of redistribution. For example, public education is paid for out of taxes, with wealthier individuals paying more in taxes than the cost of the services they receive and poorer individuals paying less than the full cost of the education. We will address each of these justifications for stadium and arena subsidies in turn.

To justify a stadium subsidy on efficiency grounds requires an explanation of how the market outcome will result in “too little” quantity. That is, one must explain how marginal social benefit from the stadium exceeds the marginal social cost. A difficulty in this case is that sports facilities are very lumpy; the debate often focuses on whether to build a facility, not about increasing the seating capacity by an additional seat. The market outcome, therefore, may be no construction of a stadium or an arena at all, and consequently no sporting events. This is the market failure justification implicit in the “build it and they will come” strategy of cities whose intent is to lure an existing franchise away from some other city or to induce a professional league to grant the city an expansion franchise. It is also the justification for a city to replace an existing facility to keep the current team or teams from moving.

A recent example from the NBA illustrates the kind of thing that often goes on now. The Seattle Supersonics were unhappy with their former home, KeyArena, and sought to have the city of Seattle build a new arena. Seattle refused and the team explored moving, which would require breaking their lease with the City of Seattle for KeyArena. A lawsuit ensued and they settled out of court, with the team moving to Oklahoma City, for the 2008-2009 season, and paying Seattle tens of millions of dollars to break the lease. Oklahoma City attracted the team by promising to spend $100 million renovating its existing arena to bring it up to current NBA standards and an additional $20 million to construct a practice facility. The existing arena in Oklahoma City was built without an occupant during the 1990s as part of a downtown redevelopment plan. The Seattle-Oklahoma City case suggests relevant lessons: Professional sports leagues are able to restrict entry and play one city off against another to extract the best subsidy deal. In doing so, there is a significant positional element—one city’s fan-base loses, another gains. And teams exploit the cities where politics most effectively taps the taxpayers.

In this paper we examine the economic research on subsidies for sports franchises, stadiums, and mega-events. We ask whether economists who conduct such research reach a conclusion. Our investigation suggests that such economists largely agree that subsidization is undesirable. Before turning to the economic literature, we examine the results of a recent survey, and frame the issue in terms of economic intuition. (Emphasis added.)

In their conclusion they write,

We have seen that economists in general, as represented by Whaples’s survey (2006), oppose sports subsidies. Economists reach the nearly unanimous conclusion that “tangible” economic benefits generated by professional sports facilities and franchises are very small; clearly far smaller than stadium advocates suggest and smaller than the size of the subsidies. The fact that sports subsidies continue to be granted, despite the overwhelming preponderance of evidence that no tangible economic benefits are generated by these heavily subsidized professional sports facilities, remains a puzzle.