A Cost-Benefit Analysis of an Olympic Games

QED
Queen’s Economics Department Working Paper No. 1097
A Cost-Benefit Analysis of an Olympic Games
Darren McHugh
Department of Economics
Queen’s University
94 University Avenue
Kingston, Ontario, Canada
K7L 3N6
8-2006

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A COST-BENEFIT ANALYSIS
OF AN OLYMPIC GAMES

by

Darren McHugh





An essay submitted to the Department of Economics

in partial fulfillment of the requirements for

the degree of Master of Arts



Queen’s University

Kingston, Ontario, Canada

August, 2006



copyright Darren McHugh 2006

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To the heterodox economists

whose writings kept me sane.

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Table of Contents
Introduction......................................................................................................................... 1
Section 1 - Project Scope, Scale, and Integration in Olympic CBA................................... 7
Categorizing the Vancouver 2010 Olympic Infrastructure Projects............................. 14
Section 2 - Valuing the Spectacle ..................................................................................... 17
Estimation of the demand curve for the in-person spectacle ........................................ 18
Interpreting the area under the demand curve............................................................... 23
Additional considerations ............................................................................................. 25
Conclusion: valuing the in-person spectacle................................................................. 30
Valuing the gross benefit of the televised Olympic spectacle ...................................... 35
Section 3 – The “Olympic Halo”: The Measurement of Non-Use Values of the Olympics
........................................................................................................................................... 37
Section 4 – “Economic Impact” and the Correct Valuation of Secondary Market Effects
in Olympic CBA ............................................................................................................... 40
Is all surplus in primary markets already being measured?.......................................... 42
Price changes in secondary market ............................................................................... 43
Distortions in secondary markets.................................................................................. 45
Measuring secondary surplus generated by Olympic tourism – general approach ...... 46
Secondary surplus for tourist activity during the Games.............................................. 48
Secondary surplus for tourist activity before/after the Games...................................... 55
Conclusion – net benefits of tourism ............................................................................ 56
Section 5 - Are the Olympics a Worthwhile Public Project?............................................ 58
Event Costs ................................................................................................................... 59
Event Benefits............................................................................................................... 60
Conclusion .................................................................................................................... 61
References......................................................................................................................... 62

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Introduction
Every two years, the International Olympic Committee convenes to select the next
host city for a Summer or Winter Olympic Games, and these decisions are preceded by
strenuous marketing efforts by candidate cities anxious to land the Games. The economic
virtues of hosting the event are loudly extolled by those who are endeavouring to hold it,
but from a correct economic cost-benefit analysis (CBA1) perspective, does an Olympic
Games generate positive net benefits for the host nation?
The evaluation of the “Olympic Project” (for lack of a better term) is unique in
the number of challenges it poses for the practitioner of CBA.
One interesting problem is the complexity and interdependence of the various
activities required. Hosting the Olympics is not merely a public project, it is many public
projects. Venues must be built. Infrastructure must be improved. Housing must be
provided. Projects which might have happened anyway are redesigned or rescheduled in
order to accommodate the Games. All of these capital investments have benefits besides
that of enabling the city to host the Games. How should the costs and benefits of holding
the Games themselves be distinguished from the costs and benefits of the capital
investments required to hold them?
Another interesting problem is that many of the most important advertised
benefits of holding the Olympic Games are extraordinarily difficult to quantify. What is
the benefit of “increased international visibility”? It may certainly lead to an increase in
tourist visits and tourist expenditure, but is there a net benefit from this increased
tourism? What is “the pride of hosting the Games” worth? If the investments in the

1 Throughout the document, the ‘CBA’ acronym will be used interchangeably to refer to the process of
cost-benefit analysis, and as a generic label for any study which contains cost-benefit techniques.
1

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facilities for the Games lead to greater successes for national amateur athletes in the
future, what’s that worth? The questions are endless.
In short, the quantification of the costs and benefits of holding the Olympics
touches upon almost every aspect of CBA theory.
It is rather surprising to this author that a methodologically correct and complete
Cost/Benefit analysis for such a large, visible, and important undertaking seems never to
have been attempted. The more typical approach by Games proponents is to conduct an
ex ante ‘economic impact study’, such as the one written by the BC Government Capital
Projects Branch (2002) (and updated in Intervistas (2002)) 2 for the 2010 Games in
Vancouver. This study contains a wealth of information and analysis, but unfortunately
differs from a Cost/Benefit analysis in several important ways which this paper will
explore.
The Canadian Center for Policy Alternatives (CCPA, 2003) used data from
Intervistas to create the outline of a “Multiple Account Evaluation” (MAE). This form of
study approaches costs and benefits in a spirit more in keeping with that of true CBA, but
places these costs and benefits in different “evaluation accounts” (such as ‘government
financial’ , ‘resident/consumer’, ‘environmental’, ‘economic development’ and ‘social’)
rather than unifying them under a single perspective (as CBA would do). An MAE also
permits the analyst to avoid monetizing any hard-to-monetize cost or benefit, instead
leaving the entries of different accounts in incompatible units where desired and
explicitly leaving the reader with the task of weighing ‘apples and oranges’. As befits
their ‘opposition’ perspective, the CCPA study also neglected the non-Olympic benefits

2 Both the BC Government and Intervistas expressly acknowledge that their documents are not attempts at
Cost/Benefit analysis and should not be read as such.
2

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of Games-related capital expenditures, which led to an understatement of the net benefits
of the Games.
The most complete ex post study of a Games is usually the Official Report
released for the Games. Unfortunately, the economic analysis in this document is really a
financial analysis, which considers costs and benefits from the point of view of the
organizing committee rather than society as a whole. Using such an analysis, which
explicitly treats direct government contributions as revenue and ignores any capital cost
not incurred by the organizing committee, the Official Report for the XV Winter
Olympic Games in Calgary (1988) concluded that the games had made a ‘profit’ of $30
million dollars.
To correct all of these shortcomings and create a complete and correct CBA of an
Olympic Games (either ex ante for an upcoming Games or ex post for a completed
Games) would be a heroic task. However, this paper will attempt, in the context of the
upcoming 2010 Winter Olympics in Vancouver/Whistler, to rigorously address a
representative cross-section of those topics that should be found in a full blown Olympic
CBA, including:
1. Dealing with project dependency via a framework for the classification of costs
and benefits into the categories of “event specific” and “infrastructure related”
2. Rules for identification and treatment of “related” infrastructure projects
3. Evaluating the net benefit of “the Olympic Spectacle”
4. Evaluating the net benefit of the pride engendered by the Games for local citizens,
which we might call “the Olympic Halo”
5. Valuing the net benefit (not economic impact) of induced Olympic Tourism
3

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Primary sources of estimates for the 2010 Games are the Bid Book which VANOC
(the Vancouver Olympic Committee) was required to submit to the IOC, the Intervistas
paper referred to above, and the Auditor General (2002) review of the Games estimates.
The comparison of ex ante estimates and ex post data from a completed Olympics (such
as the 1988 Calgary Winter Games) would have permitted additional lines of inquiry,
particularly the investigation of any systematic underestimation of capital construction
costs or tourist visits. However, for space reasons, this paper will not concern itself with
those issues; all published estimates for the 2010 Games will be taken at face value. The
focus of this paper is the accurate conceptual treatment of the data, not the accuracy of
the data itself.
The paper will, however, combine conclusions drawn in each of its sections above
with published estimates to produce a modified “bottom line” for the 2010 Winter Games
which is more in line with what a full blown CBA study would produce.
To do so, it is necessary to consider the timing of expenditures and realized benefits.
Correct discounting and treatment of inflation must be applied to each of the individual
costs and benefits in order to permit a meaningful assessment of the project as a whole.
When using estimates prepared by others (as this paper attempts to do), an additional
difficulty arises, as it is necessary to understand what assumptions regarding discounting
and inflation are already embodied in those estimates, and what additional manipulations
are required to make them consistent and correct for use in a CBA framework.3
All financial values quoted in the paper are in 2002 Canadian dollars. The Bid Book
is mandated by the IOC to contain estimates in 2002 US dollars. The Bid Committee

3 This interpretation can be particularly difficult when using estimates which were not prepared with CBA
in mind.
4

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used an exchange rate of 1.55 CAD/USD to convert their original CAD estimates to US
dollars, and to recover those original estimates this paper has used the same exchange
rate to convert back to Canadian dollars (except where otherwise noted). Generally, the
estimates which are drawn from sources other than the Bid Book are generally already
consistent with the Bid Book with respect to inflation, and this paper will perform little
extra manipulation in that regard.
Discounting is more problematic. Generally the estimates used here were not
generated with any discounting methodology at all; therefore, wherever possible, this
paper identifies the timing of costs and benefits, and discounts them to reflect present
values as of 2010, using a discount rate of 10%.
Finally, as in any CBA, it is important to define the point of view the analysis will
take. The question of point of view in CBA is also known as the question of standing.
Only those people whose preferences are deemed relevant to the CBA have standing,
while the impacts on others, whether positive or negative, are ignored. Maintaining a
consistent point of view is essential for any correct CBA, and doubly so for a project such
as the Olympics, with large size, substantial tourism impacts, and multiple levels of
government involvement.
Olympic advocates often prefer to look at the Games from the provincial perspective,
the regional perspective, or even the private perspective, 4 and these points of view are
conceptually consistent even if they are almost universally frowned upon by CBA
advocates in practice. This paper will follow generally accepted CBA practice in viewing
all costs and benefits from the national perspective, and make all necessary corrections to

4 Using the private perspective renders CBA indistinguishable from standard financial accounting – indeed,
CBA has often been described simply as ‘project accounting from a national perspective’.

5

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existing data and estimates which, at least for the 2010 Games in Vancouver, are entirely
conducted from a provincial point of view.
6

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