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Section B Managerial and individual decision problems

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1 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.

2 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.

3 Application: Positive externalities and sport
Reading Overview: Grimes, P, Register, C. and Sharp, A 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 , London: Strategy Unit: (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

4 Participation in sports and fitness activities and the sports sector
Potential benefits of participation in sport and physical activity Private benefits to the individual (internal) e.g. psychological and physical health benefits Wider economic and social benefits Health, education, crime reduction, social inclusion Mega events and the economic contribution of the sector Sport and fitness as economic public goods and the extra (external) benefits of sports beyond personal satisfaction Policy implications

5 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 Improved health; Individual motive and wider social benefits e.g. lower health costs A collective feel-good factor at a national level if, for example, national teams do well Improved educational outcomes; individual and social benefits Crime reduction; social benefit Social inclusion; individual and social benefits Economic benefits; social benefits See 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 , London: Strategy Unit

6 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 Improved health; Individual motive and wider social benefits e.g. lower health costs

7 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? Negative costs due to injuries e.g. high risk sports especially for men – but much less a problem re fitness – raises questions with whether sports or simply physical activity should be promoted

8 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 Improved educational outcomes; individual and social benefits

9 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 Crime reduction; social benefit Evidence is difficult to obtain because causal chains difficult to isolate. Coakley, J., 1997, Sport in society: Issues and controversies, Boston MA: McGraw Hill

10 (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 Social inclusion; individual and social benefits Helping to achieve social cohesion by developing social capital

11 Implications: potential market failures in sports and fitness sector
positive externalities/external benefits of sports participation mean market outcomes will be inefficient Cause is some distortion Violation of underlying assumptions of competition

12 Implications; positive (consumption) externalities from participation
Price Supply:MC At q- MB > MC, output too low, case of environmental quality as a public good at q+ MC >MB – output too high, case of pollution as a negative externality or over harvesting of an open access resource Private demand (benefit): MPB qP: private optimum Resources (available to the sports and fitness sector) = Consumption (participation)

13 Positive externalities (social benefits) in consumption
Price Supply: MC External benefits At q- MB > MC, output too low, case of environmental quality as a public good at q+ MC >MB – output too high, case of pollution as a negative externality or over harvesting of an open access resource Social demand (benefit): MSB MPB qp Resources (available to the sports and fitness sector) = Consumption (participation)

14 Inefficient outcome due to positive externalities (social benefits) in consumption: Q* > qp
Price MPB Supply: MC Social demand (benefit): MSB At q- MB > MC, output too low, case of environmental quality as a public good at q+ MC >MB – output too high, case of pollution as a negative externality or over harvesting of an open access resource qp Q*: social optimum Resources (available to the sports and fitness sector) = Consumption (participation)

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

16 Policy implications: support needed to increase consumption to Q. e. g
Policy implications: support needed to increase consumption to Q* e.g. lower prices for consumers Price MPB + subsidy MPB Supply: MC Social demand (benefit): MSB At q- MB > MC, output too low, case of environmental quality as a public good at q+ MC >MB – output too high, case of pollution as a negative externality or over harvesting of an open access resource qp Q*: social optimum Government needs to increase resources/consumption by this amount –e.g. using subsidies

17 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 Economic benefits; social benefits See 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 , London: Strategy Unit

18 Participation and elite sport
The ‘virtuous cycle’ of sport

19 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 But no public money was spent for the Los Angeles games Multipliers are overestimated (impacts overstated, leakages underestimated) Costs are underestimated (escalating costs, opportunity costs) Szymanski, 2002, Coalter, 2004,

20 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? Baade, 1996, Professional sports as catalysts for metropolitan development, Journal of Urban Affairs, 18(1) 1-17

21 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 See e.g. Gratton and Taylor or see Coalter, 2007, A wider role for sport. Whose keeping the score? Routledge) Evidence based practice is not systematic – requires measurement before and after participation Measurement problems re economic contribution of sport: E.g. grey areas re all sort of sectors and issues (under/over estimates?) such as sports related value of bicycles, public sports broadcasting, voluntary work, attendance at sports events, sports tourism, wider infrastructure

22 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? See Sport England (2007) The active people survey http///www.sportengland.org/index/get_resources/research/active_people.htm

23 Other socio-economic benefits associated with the sports sector
Contribution of sports sector Overall importance of sport to the economy Economic benefits; social benefits See 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 , London: Strategy Unit

24 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 Sport England Economic Value of Sport in England Growth in the sport sector has outstripped the English economy as a whole over the past two decades, according to research published in August 2010. The sport economy’s annual contribution has reached £ billion1 - up 140% in real terms between 1985 and 2008. The research was commissioned by Sport England and carried out by the Sport Industry Research Centre at Sheffield Hallam University. The researchers found that growth between 2005 and 2008 was “driven by investment directed towards the London Olympics and a long-term Sport England policy to increase sport participation”. They argue that sport’s resilience reflects the growing number of people who “consider sports participation as being more a basic need than a luxury”. Other key findings of the report, The Economic Value of Sport in England, include: Consumer spend on sport in England was £ billion in 2008 – up 138% since 19852 The number of people with sport-related jobs has also grown, reaching 441,000 – that’s 1.8% of all employment in England3 Over three-quarters of these jobs are in the commercial sector, with 13% working in the public sector4 The report also compares the value of the sport sector across the country. It finds that London makes the largest contribution, reflecting the size of the capital’s economy. However, per capita spending on sport is greatest in the east of England at £404 Full versions of the national and regional reports available at this Sport England web page Footnotes 1 This figure is the gross value added (GVA) by the sport sector in 2008, based on current prices. GVA is calculated as the sum of wages and profits generated in the sector. GVA in 1985 was £3.358 billion, and in 2003 it was £ billion. 2 Real term growth. Sport-related consumer spending accounts for 2.3% of overall consumer spending in England. 3 Sport-related employment in England has grown from 304,000 in 1985 to 441,000 in 2008. 4 339,000 (76%) of sport-related employment was in the commercial sector in The voluntary sector accounted for 11% and the public sector for 13%.

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

26 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

27 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.

28 Appendix Participation and policy: why there is a need for intervention

29 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” Collins (2003a) Sport and social exclusion, London: Rutledge Collins (2003b) ‘Do we still believe in sport for all?’ Recreation 62.1, pp Rowe, Adams and Beasley (2004) Driving up participation in sport: the social context, trends, the prospects and the challenges and Coalter, F (2004) Future sports or future challenges to sport? Both in Driving up participation: The challenge for sport, London: UK Sport Collins (2004) ‘Sports participation in decline?’ Recreation, November, pp Sport England (2004) A Framework for sport in England, London: Sport England Another survey is The Active People Survey carried out in in England Sport England (2006) Sport England Active People Survey, London: Sport England see

30 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? See Sport England (2007) The active people survey http///www.sportengland.org/index/get_resources/research/active_people.htm Some individual, non-competitive sports have become more popular since 1996 (Coalter, 2004) 1.7% increase in participation in swimming 43% increase in keep-fit e.g. aerobics 21% increase in cycling 24% increase in weights Why is this? Their individuality is attractive in itself Decline in sports has mainly been associated with team games although some team sports have become more popular for women Organisation is mainly informal – not governed by a body of structures, rules and regulations People can fit participation into their lives – timing is flexible Relatively low skills required People are concerned about fitness and health Some activities are ‘lifestyle’ or ‘adventure’ focussed which attract passionate support 30

31 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

32 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

33 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? Lower participation than socially optimal E.g. because there are inefficient opportunities for participation in sport due to under-supply of sports related facilities But for government intervention/spending to be optimal it needs to determine society’s willingness to pay as there are opportunity costs E.g. using contingent valuation methods, political processes (Voting) Playing for success established out-of-school study (i.e. study centres) at football clubs and other sports grounds funded by government and private sector e.g. the clubs. Began in = educational support/sport development Riding for the disabled organises riding as a therapeutic activity

34 Policy implications (see DCMS/Strategy Unit, 2002)
DCMS, 2002, Game plan: A strategy for delivering government’s sport and physical activity objectives, DCMS/Strategy Unit More money should be spent on facilities and staffing them? (Supply side) Improving existing facilities – make them more effective e.g. use schools, increase services (crèches), refurbish - Construct new facilities (more expensive) - Train staff/coaches Overcome barriers to access (Demand side) Motivation: behavioural change; Time: flexible hours; Cost: admission, equipment - Support/subsidies to poorer people to enable them to pursue sport); information Given the relative success of individual sports should policy focus on participation rather than competition and winning? What do you think? 34


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