The London Olympic Bid - Money Well Spent?

The major concepts behind the plans to stage the Olympics involve opportunity cost and externalities.

Opportunity cost is the cost expressed in terms of the next best alternative foregone. It seeks to address the issue of 'cost' in a different way than merely looking at things in terms of financial cost. Saying that the Olympics will 'cost £2.375 billion' only tells us a small part of the total picture. Opportunity cost seeks to offset the financial cost in terms of what you are getting for that financial outlay in comparison with the benefits that could be acquired if the money was spent on alternative goods or services.

The central point of economics and business is decision making - deciding between allocating resources to competing uses to satisfy wants and needs. In so doing, we are placing relative values on these competing uses. One of the arguments in favour of hosting the Games is that it will deliver a wide range of economic and business related benefits that will not just be experienced at the time of the Games itself. Some of the obvious immediate benefits will be the jobs created, the increase in tourist revenues and the improvements in infrastructure. However, there are other benefits that may be less obvious.

This was one of the arguments for the much-criticised Millennium Dome. The Dome itself and the entertainment it housed was one thing - whatever was thought of it by those who visited or chose not to as the case may be - but one of the less talked about benefits was the impact it has had on the local area. The area was a derelict site at the heart of a run down area. The Dome meant that new transport infrastructure was developed; land brought back into use and could have been responsible for breathing new life into the immediate region. Such improvements are essential to attract new housing, new businesses and other entertainment and leisure facilities. Such improvements would not, it could be argued, have happened without the steps taken to build the Dome.

Image: The Millennium Dome - will the costs be outweighed by the benefits eventually? Copyright: www.freeimages.co.uk

What we have to do, therefore, is find some way of attaching relative values to the different decisions that could be made. The cost for the Games is estimated at £2.375 billion. What else could £2.375 billion buy?

A new hospital in Manchester - a so-called super hospital - was estimated to have cost £400 million in 2001.
The cost of building a new primary school in Worcestershire was estimated at £1.5 million, the capital cost of a new secondary school in Wales, £13 million.
The average cost of constructing one mile of dual three-lane motorway in 1998 was estimated at £17.1 million.

Using such information we can look at the 'cost' of staging the Games as follows:

The question is, therefore, does the money spent on hosting the games represent a higher value in terms of the benefits gained than any of the other projects? The 'true' cost of hosting the Games, therefore, could be expressed not as £2.375 billion but in terms of the 6 hospitals foregone or the 158 new primary schools sacrificed.

To try to make some sense of this approach we need to have some understanding of the relative benefits and costs associated with such decisions. It is all very well suggesting that we are sacrificing 158 new primary schools but do we need new primary schools more than we need to host the Olympics?

Externalities are the effects on a third party (i.e. someone who is not directly involved in making the decision) of a decision. Externalities can be classified as positive, where there are benefits to third parties, and negative, where the effects are considered to be detrimental. External costs and benefits are important because, together with the obvious costs - the private costs such as the cost of building the new stadium and providing the infrastructure - they give a picture of the 'true' costs.

These external costs could include the cost to local businesses in and around London of the disruption that might be caused during construction work and improvements to the transport facilities, it could be the cost of the loss of regular tourists to local hotels at the time of the Games who may be put off by the congestion they might anticipate from the staging of the Games or it might be the loss of revenue experienced by other 'competing' facilities during the Games themselves - tourist spots like Stonehenge, for example.

The external benefits, however, may also be extensive. Hotels and other tourist attractions in and around London might benefit from the increase in tourism to the area, transport users in the capital may benefit from a better transport system, businesses throughout the UK might benefit from the injection of capital and the associated work that is likely to be created.

For example, the bid team suggests that clothing for 50,000 volunteers will have to be made - if such work goes to a UK textile firm it could be very beneficial indeed. Add into this the fact that in addition to hosting the Olympic Games, there will be the responsibility of hosting the Paralympics - the benefits that will be derived to those who have disabilities will be enormous as London is transformed to accommodate their needs - and the needs of disabled people who visit the city after the Games have long finished.

Balance this with the costs and benefits potentially derived from the other options - the benefits of the extra hospitals, schools or whatever and you have a basis for making an assessment as to whether the time and money expended on the bid is worthwhile.

Questions

In groups of 3 or 4, identify as many private and social costs you can think of in London staging the 2012 Olympic Games. You do not have to identify the actual costs in terms of money but you may be able to get some ideas on the extent of the expenditure involved by looking at the experience of Athens - see the links below to help you. What you are looking for is to identify the obvious and the not so obvious costs involved.
Now do the same thing for the benefits.
Now consider the social and private costs involved in ONE of the alternatives to spending the money on hosting the Olympics.
Produce a report or a presentation on the economic and business issues surrounding London's bid to host the Olympic Games in 2012. Your report/presentation should highlight the main issues and provide some judgements about whether the bid should continue and whether there is an economic and business argument for hosting the Games.

Related Web sites for Research

Mark Scheme

Because the format of the task is based on an element of group work and the possibility of a report or presentation, there are no real hard answers to the questions. You are asked to think of as many of the costs and benefits as possible for both hosting the Games and for one of the alternative options identified in the theory section above - the article and the theory will give you some clues and some research using the links will provide you with help in identifying others - use your creative juices and think laterally!

Once you have worked through these you are asked to bring your thoughts and ideas together through a report or a presentation. The aim of this task is to get you to synthesise information collected, organise it into a coherent argument and present it appropriately.

Again, there is no right or wrong way to do this but you will need to think carefully about how you plan it - ensure that you consider both sides of the argument, try to offer support for your points in the form of data, quotes (always acknowledge them by the way), statistics and so on.

You are invited to draw some conclusions and make a judgement about whether you think the Games should come to London on economic and business grounds. The latter point is vital - you must present the economic and business arguments but in so doing you are at liberty to interpret to what extent some issues can be considered a legitimate business or economic argument.

Mind your Business - 22 November 2004