Thursday, 28 July 2011

Consumer surplus of events

In my recent posting on World cup costs and benefits I made mention of the Ph.D. thesis of Sam Richardson from Massey University. Richardson’s thesis was on "Assessing the economic justification for government involvement in sports facilities and events in New Zealand".

On taking a quick look at the thesis the following comment stood out for me:
The final analytical contribution of this research involves the estimation of consumer surplus benefits from a demand model for representative rugby in Wanganui. The consumer surplus benefits are then compared to the cost of local government involvement in the upgrade of the playing facility to evaluate whether the council’s involvement was economically justified. (Emphasis added.)
What I don’t see is why you would compare consumer surplus (CS) to costs to evaluate the council’s investment.

Three question came to mind for me: 1) If CS is a reason for government involvement in a project then isn’t this a reason for government involvement in almost everything? I meant the CS generated by computer software, for example, must be huge and thus should the government not subsidise Bill Gates?! 2) If there really is enough CS to justify government involvement doesn’t this tell us that that real issue here is one of the pricing of the event? If the council priced in such a way as to capture the CS, e.g. some form of price discrimination, then evaluation of its investment would be easy, just look at the profits generated. 3) If there is a large amount of CS to be captured then why have the council involved at all? Why not just let the private sector run/build the event/stadium, pricing in such a way as to capture the CS, and let the event stand on its own economic feet? No government involvement is necessary.

Of course I could just be missing something obvious.

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