The Opportunity Cost of Hosting the Olympic Games

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According to the Sports Book Review, the modern Olympics were first held in 1896 with only 12 countries. Today, the Games attract thousands of athletes from 206 countries around the world. In ancient times, the Games were always held in Greece. Today, in the spirit of international cooperation, the Games are held in different host cities every four years.

It is commonly believed that hosting the Olympics has a great deal of benefits such as altering the design of the city, improvements in transportation and infrastructure,and international investment. According to the Council on Foreign Relations, in 1984 alone, Los Angeles actually made a profit of $215 million because it already had the sports arenas that were needed for the Olympics, in addition to earning revenue from selling television broadcasting rights.

However, the benefits of hosting the Games are not as great as imagined and there are often many drawbacks. Simply put, for the last 20 years, the Olympics grew too big, too quickly. In the 2016 Rio de Janeiro games, for example, the host city faced a siege of problems such as funding shortfalls, under-equipped police, thousands of dollars of infrastructure that went obsolete as soon as the mega-games ended etc.

Currently, bids for 2024 Games are underway and many wonder whether any city would want to host the Olympic Games anymore. As the International Olympic Committee (IOC) receives fewer bids with each Games, the future of the Olympics is looking uncertain. In this article, I will provide a cost-benefit analysis on the hosting of the Olympic Games on the host city and provide a prediction on what effects hosting the games will have on Los Angeles.

The first downside is that hosting the Olympic Games are a financial drain on the host cities. According to a study conducted by Claremont University, a host city can spend hundreds of millions of dollars to put on the Olympics. The process of bidding alone costs $100,000 in application fees, and a city must pay an additional $500,000 if it is accepted as a candidate city. Then the candidate city has to pay for the onsite inspection, as well as all formal responses and impact studies which cost millions of dollars. The host city must  then dedicate hundreds of millions of dollars for marketing, advertising, logistics, infrastructure revision, building future amenities, all to impress international investors and the International Olympic committee, often going over the intended budget.

In 2008, Beijing hosted the most expensive Summer Games to date at $40 billion, building thirty-seven stadiums and venues as sports facilities,which included $1.1 billion on transportation improvements, $200 million to demolish dilapidated housing and urban buildings, and $3.6 billion to transform Beijing into a “digital” city.  Due to this expense, cities will spend years paying off debt to host the Olympics. For example, the event cost Montreal more than $6 billion to host in 1976, leading the city to spend the next 30 years paying it off until the debt was forgiven in 2006.

Why do cities spend so much? As cities with the most extravagant bidding plans are awarded hosting privileges, they set higher and higher standards for each subsequent game. Thus, to win over the IOC quicker than competitors, host cities will rush their applications and promise too much without taking the time to understand the impact of hosting the games. According to Robert Barney, a professor at Western University specializing in the study of the Olympic Games, “Cities began to see it [the Olympic Games] in a different light when the cost escalated beyond all reason, and beyond the amount of dollars that they could raise through normal revenue processes.”

The second downside is that the Olympics force host cities to create expensive, overspecialized sports infrastructure and buildings that often fall into disuse. In past years, bid plans have included construction for new hotels and dormitories, media centers, athletic facilities, public transportation, event management, security, airport improvements. The opportunity costs for these projects are enormous with millions that could have been spent on public investment, health, education, defense, and more. Using the Olympics to justify construction is weak because these facilities could be built regardless of the games, without expensive customizations specifically for Olympic events. In Rio de Janeiro, for example, the $700 million athletes village for the 2016 Games was turned into luxury apartments that are now “shuttered” and the Olympic Park is “basically vacant” after failing to attract a buyer.

Finally, the Olympics displace the residents of the host city. According to the Center of Housing Rights and Evictions, the six summer Olympics from the 1988 Seoul Games and Beijing’s 2008 games caused an estimated 2 million people to be forcibly evicted from their homes with minimal compensation. This does not only happen in Beijing but in places like Seoul, Rio, and others. Not only does this move citizens away from friends, family, it effectively turns them into domestic refugees, far away from their homes and place of business.

While all these costs must be considered, there are also several benefits to hosting the games. For one, host cities receive direct economic revenue in the short-run from ticketing for spectators, sponsorships and advertising fees from major sports brands, and a share of television broadcasting rights. Meanwhile, infrastructure improvement can provide a form of fiscal stimulus to a city with high unemployment, raising GDP, consumption and economic investment.

In the long-run, there are also several indirect economic benefits. The Olympics increase a country’s global trade status. The very act of bidding for the Olympics is a signal to other countries that the nation commits itself to trade liberalization and lowering protectionist barriers. This advances a reputation for being a center for world class citizens, as well as, for future sporting events, conventions, and tourism. One example was, after a successful 1955 bid for the 1960 Summer Olympics in Rome, Italy joined the United Nations and began the Messina negotiations that led to the creation of the European Economic Community..

Aside from infrastructure, tourism, due to a worldwide advertising campaign, is likely to skyrocket. While this means more tourist revenue in the short run, in the long run it also increases foreign investments and better trade networks. For instance, based on a study by the University of Utah, following the 2002 Olympic in Salt Lake City, there has been a major economic boost in winter sports, with tourists now seeing it as a premier ski destination for athletes.

Despite these benefits, many argue these points do not hold water. With regards to the increase in tourism, it could also be argued that, in the process of preparing the Olympics, it could crowd out the tourism industry, with some non-sports tourists dissuaded from visiting by concerns about Olympic crowds. According to the Council of Foreign Relations, Beijing and London both saw fewer international visitors during the months they were hosting the Olympics in 2008 and 2012 compared to the same months in previous years. With regards to TV rights revenue, this is offset by the fact the International Olympic Committee has been taking larger percentages. In the 1990s, for instance, it took 4% of revenue compared to the 70% it pocketed from the 2016 Rio Games.

In all possibility, it could be that the only reason countries host the Olympics in the first place could be civic pride and a desire to prove to other nations, that their destination is a host city. Meanwhile, after each financial failure and with fewer exceptions, fewer and fewer countries wish to hold the Olympics.

Recently, Los Angeles kicked off its bid to host the 2024 Olympic Games by promising to provide an Olympic experience better than any in the past. Los Angeles has a strong Olympic legacy in 1932 and 1984 to back up its claims, both considered to be among the most successful Olympic Games ever. In 2024, the games, according to a UC Riverside study is expected to generate $14.0 billion in economic output, support 93,566 full-time equivalent jobs, generate between $6.1 billion in labor income, and generate $742.4 million in state and local tax revenue throughout the state of California. To put this into context, the total estimated economic output generated by the 2024 Games is nearly equal to the combined Forbes valuations of Los Angeles’ five largest sports franchises—the Rams ($2.9 billion), the Lakers ($2.7 billion), the Dodgers ($2.5 billion), the Clippers ($2.0 billion), and the Kings ($580 million).

LA 2024 seeks to harness a model that fits the City of Los Angeles with few innovations. The City of Los Angeles is home to a wealth of existing venues and infrastructure that allow LA 2024 to utilize existing world-class venues, creating the best experience for athletes. In an article by the LA times, in  an effort to cut the normal deficit expenses, LA plans to make use of existing arenas, dorms at UCLA, the media center of USC, all to cut down on spending and facility investment. Currently, the projected revenue is $5.3 billion, which could be covered from broadcast rights, corporate sponsorships, ticket sales etc.

Los Angeles is constantly finding new innovations to accommodate demand for traffic-easing infrastructure and currently has the largest ongoing transit construction program in the United States. Over the next decade, Los Angeles will invest $88 billion into subway, light rail, rapid bus, LAX, commuter rail etc, connect every corner of Los Angeles. Los Angeles also aims to deliver the first energy-positive Olympic Games and through this commitment realize long term outcomes in local water, local power, local solar power, energy-efficient buildings, carbon and climate leadership, and waste and landfills.

In this review, it would appear that the benefits of hosting the games weigh less than the costs, than other public services like health and education. The fact that Los Angeles is expected to profit in 2024 from these games lends evidence to claims the Games are transformative. However, this is an expensive gambit to the host

 While the future of the Olympic Games seem bleak, the International Olympic Committee is working to resolve problems by evaluating cities based on key opportunities and existing, built-in infrastructure. This will ideally reduce the coast of bidding and promote sustainability in all aspects of the Olympics Games. Although this idea is untested, it does look promising.

 

No Grounds to Stand On: Analyzing the Case Against Lil’ Bill

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The video was all over Facebook, trailed by hundreds of angry comments from USC students. The reason? “I’ve been asked to leave the campus,” says Aaron Flournoy in the clip. “It’s like an eviction so to speak.”

The word “eviction” glares in bright gold from its subtitle on the screen, as if daring someone to object to its usage. First covered by Annenberg Media on March 31 by Cole Sullivan, the story of Lil’ Bill’s Bike Shop has frequently been spun as an economic injustice, for reasons that have little economic justification.

Lil’ Bill was being “evicted” from campus, because Solé Bicycles was becoming a vendor for USC Village. Solé and the university had agreed to sign a non-compete clause, preventing USC from allowing a competitor like Lil’ Bill to sell bikes on campus with a business move that has been virtually banned from California, except in three circumstances:  

  1. When one business acquires another
  2. When a partnership is dissolved
  3. Limited Liability Companies (LLCs)

USC isn’t acquiring Solé. The two had no preexisting partnership, and are not involved in an LLC, so none of the three circumstances apply. Has Lil’ Bill been illegally targeted?

When asked to elaborate on the specifics of the non-compete in an email exchange, David Donovan, Associate Director of USC Transportation, who has previously addressed media inquiries regarding the Village, declined to respond. Even so, studying the case history of non-competes in California may offer an answer.

An exception to California’s strict criteria for non-competes emerged in Campbell v. Board of Trustees of Leland Stanford Junior Univ., 817 F.2d 499 (9th Cir.1987), where the court ruled against Stanford’s contract preventing a professor from reproducing a psychological test he developed. Campbell states that contracts “where one is barred from pursuing only a small or limited part of the business, trade or profession” are valid, and that the burden of proving whether a contract fully bars business is up to the plaintiff.

This statement became known as the “narrow-restraint” clause, and has since been applied to several other cases. It might be Solé’s justification behind implementing a non-compete clause, which would not fully bar Lil’ Bill from his profession of fixing bicycles. In fact, in Boughton v. Socony Mobil Oil Co., the Ninth Circuit upheld the narrow-restraint clause to allow a non-compete that prevented the use of land for a competitor’s business, rather than prevent the competitor from carrying out business.

The only problem? In 2008, the California Supreme Court overturned the “narrow-restraint” clause in Edwards v. Arthur Andersen LLP, claiming that “if the legislature had intended the statute to apply only to unreasonable or over-broad restraints, it could have included language to indicate so.” While the Court in Edwards agreed with the Boughton decision, the Court argued that restricting use of land did not qualify as a non-compete. Furthermore, California lawyer David Trossen points out that the court claimed Boughton did not offer any guidance on evaluating non-compete, suggesting that using Boughton as a precedent for justifying a non-compete would be risky for Solé.

Yet Solé must have felt threatened enough by Lil’ Bill to risk a non-compete clause. After all, according to the Daily Trojan, Lil’ Bill and his family have been serving the USC community for 40 years. Surely, those 40 years gave enough of a foundation for them to gain significant market power and become a monopoly within the USC community. Perhaps Solé meant to kill Lil’ Bill’s market power.

Or perhaps the justification was even simpler. USC faces strong incentives to favor Solé’s non-compete over Lil’ Bill. The university financially benefits from Solé paying rent for a venue in the Village. Furthermore, in 2028, when USC Village will be used to host the Summer Olympics, Solé will reap additional profit from sales to competing athletes. Meanwhile, Lil’ Bill’s venue takes up a parking spot on USC’s property for free. Even if the financial loss of favoring Lil’ Bill were discounted, USC could face the legal cost of facilitating an illegal business. In a Daily Trojan interview, David Donovan said that “the city of Los Angeles has identified [Lil’ Bill’s] shop as an illegal business because it is operating out of parking lot and occupying a handicap space.”

But what do Lil’ Bill’s losses matter? They are excluded from the contract, as a negative externality–that is, a cost that signers of the contract cause, but are not held accountable for. And it is not enough to ask Lil’ Bill to give up his business and work for Solé, and call it accountability. When companies make decisions about their community, without the community’s legal ability to negotiate, the law itself ought to be reevaluated to consider the existing community businesses as stakeholders. To do otherwise, would be an economic injustice.

Everbooked and Dynamic Pricing in the Share Economy

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We live in an era of sharing. Technological developments and online platforms allow people today to network and earn extra income by sharing assets they already have – their cars (Uber and Lyft), their household goods (Snapgoods), and even their homes and apartments (Airbnb, VRBO, and HomeAway). Collectively, this activity is known as the “share economy,” and it is rapidly growing. Participating in the share economy is simple: go online, or open an app, and in minutes you can find a ride or a place to stay for the weekend.

Founded in 2008, Airbnb allows users to rent a place to stay overnight in a private home or apartment. Having personally used Airbnb, I can attest to the benefits of renting a private place while on vacation it’s often less expensive than a hotel, there are more options to choose from, and staying in a private place has a “local feel.” As Airbnb advertises, “Don’t go there. Live there.” This online platform has proven very popular: Airbnb today is worth around $24 billion and has helped over 40 million people find a place to stay. As Airbnb’s rapid growth both in the United States and abroad continues, Airbnb landlords are taking advantage of data science in order to raise more revenue and secure a greater number of bookings. Recently, I had the opportunity to speak with David Ordal, the CEO of a Bay-Area startup known as Everbooked that assists Airbnb landlords with market analytics and a technique known as dynamic pricing.

Dynamic pricing involves continually adjusting prices to adapt to changes in demand that are detected through data analysis. American Airlines is credited with being the first company to adopt this technique; in the early 1980s, it began experimenting with “Super Saver” ticket prices that were adjusted based upon seat availability, demand, and how far in advance customers made reservations. The results were impressive – American Airlines’ revenues skyrocketed the next year. Dynamic pricing is now universal in the airline industry, and the hotel industry has used dynamic pricing for a long time as well. Ordal founded Everbooked in 2014 when he noticed that dynamic pricing was not widely used in the vacation rental industry. He saw an opportunity in bringing dynamic pricing and data analytics to landlords renting through Airbnb. “We do the same thing as airlines, but for a place to stay,” Ordal explained. Today, Everbooked operates in 3,322 cities across the United States and looks to expand internationally in the future.

Everbooked uses an algorithm to scan through market data in real time, searching for changes in various demand factors. “We look at different factors for demand, such as seasonal trends and weekend and weekday tracks,” Ordal said. He noted that, in some cases, weekdays actually see higher demand than weekends, often due to business travelers. In addition, the algorithm tracks Airbnb reservations in a given area and even examines local FAA air traffic data, which has proven to be a good metric for predicting how many people are traveling to and from a particular locale. When the algorithm detects something notable, it automatically updates users’ prices within hours of detection. The end result is that, by having their prices updated in real time, Airbnb landlords can earn an extra 14-38 percent in revenue each year.

“A lot of clients are professional landlords,” Ordal added. “We work with hosts who are more business-oriented. These are the people who really want to understand the market, who really want to understand analytics.” In addition to automatically updating clients’ prices, Everbooked also compiles huge amounts of data on rental units in various locales across the United States, allowing clients to compare their listings to those of other nearby Airbnb landlords. On the Everbooked website, an Airbnb landlord can see what types of listings they are competing against – whether homes, apartments, or condominiums – and the average prices for each of these types of listings throughout the year. Several histograms display which prices are the most common among various types of listings, as well as which types of listings are the most popular in a given locale. Everbooked also creates graphs to help clients determine the prices they should charge for extra guests, and provides up-to-date information on seasonal demand trends.

At one time, the benefits of dynamic pricing were limited to large, highly organized businesses. Today, with the rise of the share economy, that landscape is dramatically changing. Ordal thinks that someday dynamic pricing will become universal among vacation rentals. I agree – there are simply too many benefits to pass up.

A welcome from the editorial board

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From Brexit to the U.S. presidential election, from the Panama Papers to the Petrobras scandal, political and economic fractures and fissures have shaped the majority of 2016 across the world. While basking under the unrelenting sunshine of Los Angeles, it’s easy to see the consequences of socioeconomic illiteracy as a product of chaos. However, as undergraduates at the University of Southern California, we have challenged ourselves to take the abstract laws and theorems and functions and policies from our lectures and research to apply them to the challenges of the real world. While we may not have Ph.Ds, millennials have grown up with the privilege of constant, global access and awareness through the Internet and the advent of social media. With the foundation of the USC Economics Review, we aspire to analyze and comment on economic issues as close to home as LA’s Metro expansion to those as far away as Japanese monetary policy using the unique theoretical education afforded by our studies at USC Dornsife as well as a practical education fostered by our coming of age in the information era.

As we publish our own opinions and explorations of complex topics, the USC Economics Review welcomes you to post your own questions or otherwise challenge us in the comments section. We aim to represent a wide spectrum of ideological diversity and to initiate a dialogue and an understanding for not just those involved in economic academia, but also for simply curious and civic-minded readers. On that note, welcome to the beginning and beyond of the USC Economics Review.

Sincerely, the inaugural USC Economics Review Editorial Board.