Section B –Managerial and individual decision problems Externalities in consumption and production Application to sport and exercise –By the end of this.

Section B

– Managerial and individual decision problems Externalities in consumption and production

Application to sport and exercise

– By the end of this session you should be able to explain what is meant by the economic concept of an externality and discuss efficiency and policy implications of externalities in relation to sport, exercise and the wider sports sector.

Application: Positive externalities and sport

• The wider social benefits of: – Participation in sports and fitness activities– The sports sector: success of elite sports;

urban regeneration and sports developments; mega-events; the financial contribution of the sports industry.

Application: Positive externalities and sport

• Reading• Overview: Grimes, P, Register, C. and Sharp, A. 2009.

Economics of Social Issues, McGraw Hill. Chapters 6 and 9

• For more detailed discussions see e.g.:– Oughton, C and Tacon, R (2006) The Economic and Social

Impact of Sport, Report for the Economic and Social Research Council. (on webct)

– DCMS/Strategy Unit (2002) ‘Why do we care: benefits and the role of the government’, in Game Plan: A strategy for delivering Government’s sport and physical activity objectives, pp. 42-78, London: Strategy Unit: http://www.cabinetoffice.gov.uk/media/cabinetoffice/strategy/assets/game_plan_report.pdf (on webct)

– Coalter(2007 A wider social role for sport: Who’s keeping the score, Routledge

– Gratton and Taylor (2001) Economics of sport and recreation, Taylor and Francis

Participation in sports and fitness activities and the sports sector

• Potential benefits of participation in sport and physical activity

1. Private benefits to the individual (internal) e.g. psychological and physical health benefits

2. Wider economic and social benefits• Health, education, crime reduction, social

inclusion

3. Mega events and the economic contribution of the sector

Private benefits of participation

• Personal pleasure, satisfaction and a better social life - individual motives for participation

• not sufficient as an argument for government support as there are alternatives that can do the same thing e.g. music, theatre

• But regular physical activity can yield a range of physical and mental health benefits to the individual– e.g. reduced risk of obesity; cardiovascular diseases

(e.g. related to high blood pressure) and strokes; some forms of cancers; non-insulin dependent diabetes; osteoarthritis and osteoporosis; anxiety and depression

• Wider social benefits – externalities- can follow from these individualised benefits

Wider social benefits (positive externalities) of participation: health• Improved health of individuals is also

good for society – wider benefits of a more physically active population– Reduction in health care costs – Fewer days off work; a more productive

workforce– Gains from fewer premature deaths; reduction

in lost earnings of individuals and employers • All the standard positive externalities linked to

health

Economic effects of health effects• Game Plan (DCMS/Strategy Unit, 2002:42)

estimates that health related costs constitute the largest single argument for government promotion of increased physical activity– Cost of inactivity = £2bln a year in the UK

• Working days lost 10,000• 54,000 premature deaths

– Total gain (England) of 10% increase in adult activity £500m per year

– Comparable estimates in other countries e.g. USA using direct medical cost savings

• But other factors controlled for imprecisely and there are also negative costs of sports participation – due to?

Other possible external benefits: (1) Education

• Participation in sport may generate and/or reinforce educational goals by:– Exposing students to social relations with achievement

orientated peers and educational personnel• Attracting under-achieving students to education

– Increasing the visibility and popularity of an individual– Helping students to acquire skills and qualities that can improve

educational performance • e.g. timekeeping, discipline, self-esteem, communication skills

• Evidence supports using sport as part of an approach to improving educational attainment – but difficult to distinguish between the effect of playing sport

itself and other factors • E.g. related to the extra attention/mentoring received by children on sports

and education related programmes– without the this sports programs tend not to have educational benefits

Other possible external effects: (2) Crime reduction

• Sport may help to reduce youth crime:– Displacement:

• being somewhere else so not available to commit crime i.e. because involved in sport

– Therapeutic intervention• Antidote to boredom; Enhances self-esteem; Improves cognitive

skills; Less scope for participation with delinquent peers; Creating positive relationships with appropriate role models

• Evidence from the USA: success requires an emphasis on non-violence, respect for others, fitness and self-control, confidence, responsibility (Coakley, 1997) – But projects are difficult to assess - causal relationships are

difficult to isolate, monitoring is difficult• Implications;

– Playing sport is not enough on its own to reduce crime• sportis related crime reduction programmes need to be part of a package

(3) Social inclusion: sport and community development

• Sport may be used to help people who are likely to be excluded from community activities – developing self-esteem, confidence and personal

skills or enlarging social networks

• But gains may be due simply to extra attention given to disadvantaged groups

• And some sports activities may have the opposite effect by encouraging social divisions e.g. through local rivalries

Implications: potential market failures in sports and fitness sector

• positive externalities/external benefits of sports participation mean market outcomes will be inefficient

Implications; positive (consumption) externalities from participation

Supply:MC

Price

qP: private optimum Resources (available to the sports and fitness sector) = Consumption (participation)

Private demand (benefit): MPB

Positive externalities (social benefits) in consumption

Supply: MC

Social demand (benefit): MSB

Price

qp

MPB

External benefits

Resources (available to the sports and fitness sector) = Consumption (participation)

Inefficient outcome due to positive externalities (social benefits) in

consumption: Q* > qp

Supply: MC

Social demand (benefit): MSB

Price

qp Q*: social optimum

MPB

Resources (available to the sports and fitness sector) = Consumption (participation)

Policy implications

• Without non-market intervention there will be lower participation in/access to sport and fitness activities– Participation needs to be supported

Policy implications: support needed to increase consumption to Q* e.g.

lower prices for consumers

Supply: MC

Social demand (benefit): MSB

Price

qp Q*: social optimum

MPB

Government needs to increase resources/consumption by this amount –e.g. using subsidies

MPB + subsidy

Alternative policy: Support for elite sports

• Elite sports: social benefits associated with a collective feel-good factor if national teams or individuals do well– Can encourage people to participate

• Indirect positive externalities from individual success at the elite level

Participation and elite sport

• The ‘virtuous cycle’ of sport

The ‘virtuous cycle’ of sport

2Increased

participation

3 Health/wider ‘pool’

for talent ID

1Elite success

Externalities associated with large-scale elite sporting events• The virtuous cycle – London Olympics Legacy but no

real evidence• Nevertheless, interest by potential hosts greater since

commercial success of Los Angeles games (1984)• Substantial income can be generated

– Euro ‘96 generated £120m from overseas visitors - tourism

• Wider benefits claimed = image creation, job creation, regional development, wider infrastructural investment (Barcelona?) exports, tax revenue

• Benefits also depend on type of sporting event

External socio-economic benefits associated with regeneration

• Major sporting events and new stadia could be a catalyst for regeneration if they help to construct positive Place Identity– E.g. impressions/images of prestige, tourist

attractions, community visibility• Short-lived gains (events)• Context is important e.g. location of stadia (transport, other

commerce)

• Likely to be more successful if part of a wider development strategy (Baade, 1996)– Opportunity costs need to be considered

• E.g. some expenditure is substitution, alternative (previous) uses

– Public/private balance needs to be appropriate (who benefits?) » Redistribution?

But…..………• there are many difficulties in measuring these

positive externalities due to problems related to: – Measuring sporting inputs, – Defining and measuring outcomes

• intangible and/or difficult to define/measure (Szymanski, 2002; Coalter, 2004)

• Particular problems in relation to longer term outcomes if monitoring doesn’t continue

– Overestimated/exaggerated claims? (Crompton, 1995)

– Multipliers are overestimated, costs underestimated – Bids reflect interests of urban elites? (Schimmel, 2002)

– Outcome interdependencies – other influences need to be controlled for

And….

• Cannot simply accept that sport is ‘good’• Should there be a focus on physical activity

rather than sport?• Does sport need to be part of a wider range of

processes and interventions; ‘sport plus’?– Sport as a catalyst for something else?

Other socio-economic benefits associated with the sports sector

• Contribution of sports sector– Overall importance of sport to the economy

The sports economy• Claim: greater importance than the creative

industries and contributes more via taxation than is given via public subsidies– But sport not a distinct sector and different

assumptions are made re. sport-related output

• Evidence for the UK– Sport Industry Research Centre (2010) – Value of sector = £16.7 bln– Employment = 441,000

• 1.8% of all employment in England

– Cambridge Econometrics (2004)• sports-related employment in England generated

£5.8bln in income and £5.5bln in taxes compared with £660mln in direct grants

Example: Contribution of football• See Deloitte’s Football Review

• http://www.deloitte.com– 2010-11 season: Total revenue of top 92 clubs =

£2.9blm, paid taxes of £1.2bln– EPL revenue = £2.3bln (€2.5bln)

• Combined revenues of the 5 big leagues in Europe = €8.6bn• German Bundesliga next nearest to EPL with €1.75bln

– EPL operating profits = £68m (€75m: Bundesliga = €171m)

– EPL wages= €1.6bln – Total broadcasting revenue = £1,178m– Total matchday revenue = £551m

Summary: the economic rationale for government intervention

• The wider, non-sporting benefits (positive externalities) associated with participation in sport imply that the unregulated market system is unlikely to achieve socially optimal results– Government or other intervention may be needed

• The sports sector also has direct positive benefits for economies

• But evidence for wider social benefits from sport other than those associated with health is not systematic

Test your understanding

• Externalities:– Explain what is meant by the economic

concept of an externality and discuss efficiency and policy implications of externalities in relation to participation in sport and exercise and/or the sports sector.

Appendix

• Participation and policy: why there is a need for intervention

Evidence: Trends in participation

Nick Rowe (2004) head of research for Sport England says: “The evidence we have points to stagnation in the levels of participation in sport during the 1990s…..[and] evidence on the social class or participants demonstrates that participation is significantly skewed towards the professional groups, and that these social inequalities have not become any less significant over recent years”

Evidence: trends in participation• In the UK overall participation in sport/physical

activity decreased by around 3% between 1996 and 2002 – Decline up to 2002 also among the bastions of high

participation - the professional and managerial groups and the skilled technical workers with good incomes and limited overtime

• There has been a small upturn since 2005/6 but only 21% of the population took part in moderate intensity sport and physical recreation of at least 30 mins. for 3 days a week and individual sports dominate

• Why do you think participation is so low?

Possible explanations for lower participation (1) (Collins, 2003b)

• Not enough public spending on sport– We spend less compared with many other

European countries (but France or Germany and not less than the USA or Russia

– We are not spending enough to maintain the public infrastructure

• Sport England estimate that £110m a year is needed to just maintain existing facilities – to update them could need twice this amount

Possible explanations for lower participation (2) (Collins, 2003b)

• The difficulty of recruiting voluntary labour– The work requires more time, training and the

standards are higher– People want to play for longer rather than become

coaches, officials etc

• New money from the lottery and the government goes mainly to elite performers and schools leaving out the majority of adults

• Longer working hours, increasing pressure of work

• Price increases

Policy implications

• Without non-market intervention participation in/access to sport and fitness activities is not socially efficient implying a case for: – government support to raise participation in and

access to sport and sport related activities• e.g. support sport to indirectly achieve specific social benefits

(targeted projects) e.g. Playing for Success and Riding for the Disabled

– Intervention by non-profit making organisations• Willingness to pay reflected by donations e.g. the lottery and

good causes

• But where should government/NGO support be directed?

Policy implications (see DCMS/Strategy Unit, 2002)

Increase quantity and quality of participation

Improve supply of sporting

and physical activity opportunities

Improve demand for sport and

physical activity

Improve facilitiesTrain staff and

coaches

Overcome barriers to access e.g.

motivation