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PAGE ONE

ECONOMICS
NEWSLETTER

the back story on front page economics

August ■ 2012

The Legacy of the Olympics: Economic Burden or Boon?
Lowell R. Ricketts, Senior Research Associate
“The true legacy of London 2012 lies in the future…I am acutely aware that the drive to embed and secure
the benefits of London 2012 is still to come. That is our biggest challenge. It’s also our greatest opportunity.”
—David Cameron, Prime Minister of the United Kingdom

The Olympic Games are considered the foremost athletic competition in the world. The
modern games have reached a scale that their ancient Greek founders could scarcely dream of.
More than 10,000 athletes and 5,000 coaches and team officials, collectively representing nearly
every country in the world, will convene in London for the 2012 Summer Games. Hosting over
half a million spectators each day for 16 straight days requires nearly a decade of preparation
and an extensive investment by the host nation and city. Despite these demanding obligations
of time and money, no fewer than 7 cities have bid to host each of the past 4 Summer Olympics;
in fact, the 2008 games had 11 bidding cities. Clearly, there are economic benefits associated
with the games that these accommodating hosts deem more valuable than the expected costs.1
When considering the economic costs and benefits of hosting the Olympics it is important
to differentiate between explicit and implicit costs and benefits. Examples of explicit costs
include direct spending on the construction of the Olympic facilities. Implicit costs stem from
the opportunity cost of the explicit costs; the opportunity cost of the funds spent to host the
Olympics is the benefit the host city and country would have received from the best alternative
use of the funds. Explicit benefits are the direct revenue gained from ticket sales, advertising
rights, tourism, as well as new jobs in the local economy (see chart on p. 3). Implicit benefits
are less tangible and include increased civic pride in the host city and higher international
esteem.
Costs associated with hosting the Olympics begin with the bidding process. Interested cities
spend up to $100 million to “woo” the delegates of the International Olympic Committee (IOC)
to vote for their city. During the bidding process, cities estimate their perceived economic costs
to host the games. These estimates are often understated because of the competitive nature of
the bidding process.2
Once the winner of the bidding process has been chosen, the host city has almost a decade
to prepare for the Olympics. During this time the city must expend resources to construct the
sports venues and the Olympic Village and to make improvements to infrastructure (roads,
public transportation, and telecommunications networks). These investments require the government to increase taxes and/or divert existing resources from other projects, so there are
clearly opportunity costs.
Early in the modern history of the Olympic Games, host countries routinely used public
funds for the entire cost of the games. This model of funding proved unsustainable and ended

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Federal Reserve Bank of St. Louis

in 1976 with the Montreal Summer Games.3 Breaking from the Montreal model, the 1984 Los
Angeles organizing committee sought to repurpose existing facilities and attract corporate
sponsorship. This marked the beginning of the commercialization of the Olympics and shifted
some of the financing burden to private sources. The 1984 Summer Games were a fiscal success; the games yielded explicit benefits of $335 million. This renewed global interest and dramatically increased the number of bids for following games. Despite the new financing model,
few of the later hosts accrued the same level of explicit benefits.4
The opportunity cost associated with the explicit costs is an important factor in the costbenefit analysis of hosting the Olympics. For example, instead of hosting the Olympics, a nation
could fund public works projects, launch new or improve existing social programs, or save the
funds. The best alternative use of industrial services and land use should also be considered as
an opportunity cost. The large-scale construction projects associated with hosting the games
increase business activity in the local construction industry. However, these projects crowd out 5
other construction projects that would have been undertaken if not for the increased demand
in preparation for the games.6 Additionally, many host cities are large urban centers with scarce
land to accommodate the needs of the Olympic complex. Building the facilities could put
upward pressure on land values and raise the price of housing for the community.
Hosting the Olympics has several economic benefits for the host city. The host city earns
the explicit benefits of revenue from ticket sales, broadcast privileges, and increased tourist
spending. This source of revenue is diminished to a certain degree because almost half of this
revenue is retained by the international federations, the national Olympic committees, and the
IOC itself. In addition, while total tourist spending will certainly increase because of the games,
some of this spending is not truly additional spending. For example, some travelers will choose
to avoid visiting London during the 2012 Games because of the expected increased congestion
in the city.
Host cities stand to gain appreciably from legacy effects, or economic benefits that accrue
over time. The Olympics require well-developed infrastructure, which is more challenging for
host cities in developing countries. These extensive infrastructure projects could take longer or
possibly never come to pass without some sort of urgent impetus—in this case, the Olympic
Games. For years following the games the infrastructure improvements (if used by businesses
and the community) could provide productivity gains for the local economy, as well as improve
the quality of life.
The construction of the sports facilities requires careful forward planning to avoid creating
costly facilities that will later sit vacant or have limited use. Without establishing demand for
their future use, the hefty explicit costs associated with maintaining these structures will fall to
the public. For example, in Sydney, Australia, it now costs $30 million per year to operate the
90,000-seat stadium constructed for the 2000 Summer Olympics. Athens, Greece, serves as a
shocking example of failed legacy planning; the majority of facilities used in the 2004 Games
are in a state of ruin.
In contrast to the post-Olympic experience in Sydney and Athens, several institutions of
higher learning in Atlanta have acquired Olympic facilities, including parts of the 1996 Olympic
Village now used for student dormitories, and the Olympic aquatics facility. Additionally, the
main Olympic Stadium has been repurposed as a baseball park for the Atlanta Braves. The
Olympic facilities can also revitalize urban blight by increasing real estate activity in their
immediate area. This is precisely the intention behind the location of the Olympic complex of
the 2012 Games in the run-down industrial district in East London.

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Federal Reserve Bank of St. Louis

Hosting the Olympics sends a signal to the world that raises the stature of both the host
city and nation on the global stage. The implicit benefit of positive publicity received from the
games is expected to increase tourism and attract businesses. Andrew Rose and Mark Spiegel
of the Federal Reserve Bank of San Francisco suggest that hosting the Olympic Games sends a
signal of trade liberalization to the world and results in greater trade activity in the long run.
Within the city itself, hosting the games requires the combined efforts of countless local volunteers, which engenders a sense of civic pride among the populace. These implicit benefits are
difficult to measure but are important factors in the decision to host the games.
Hosting the Olympic Games is no easy task. It requires substantial investment on the part
of the host city and nation. To determine whether it is a wise investment, policymakers must
carefully (and honestly) measure the economic costs that they will incur as well as the economic
benefits expected. Since the host city must share revenue gained from the games, it should not
expect large immediate explicit benefits. A net economic profit is contingent on whether the
host city can maximize the economic benefits it receives from legacy effects through adept
forward planning. In doing so, it will reap rewards long after the closing ceremony. ■

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Federal Reserve Bank of St. Louis

4

NOTES
1 The cost-benefit analysis that follows is not exclusive to hosting the Olympic Games and is also applicable to other megaevents such as the Super Bowl or World Cup.
2 Candidate cities often match the promised amenities of the other bidders while understating their costs to make their bid
more attractive to IOC members. This practice can lead to the phenomenon known as the winner’s curse, whereby the host
city will make itself worse off by submitting a winning bid that exceeds the value of hosting the Olympics.
3 The original projected cost of $124 million was $2.68 billion short! This burden fell entirely on the taxpayers and it was not
until 2005 that the sum was paid off through a tax on tobacco. After this incident, no country wanted to bid for the Summer
Olympics because of the perceived risk of financial ruin. Los Angeles was the only city to bid for the 1984 Summer Games
and it did so with the condition that it would not incur any financial obligation.
4 For example, the Spanish government was short $6.1 billion from the 1992 Barcelona Summer Olympics, while Atlanta
(1996) and Sydney (2000) reported breaking even. Beijing spent around $42 billion for their 2008 Summer Olympics, and it is
unlikely that there will be a net profit.
5

Crowding out occurs when increases in government spending lead to decreases in private spending.

6

A supply and demand chart is the best way to visualize crowding out. The Olympic construction projects will cause an outward shift of the demand curve, but the supply curve (representing the capacity of the local construction industry) will
remain stationary. Thus, prices for construction services will increase and some other projects will be put on hold in response.

SOURCES
Barton, L. “The Economic Impact of the Olympic Games,” in Pricewaterhouse Coopers, European Economic Outlook. Chap. 3.
June 2004, pp. 18-25.
Blitz, Roger. “London Wrestles with Legacy Issues.” Financial Times, May 3, 2012.
Burton, Rick and O’Reilly, Norm. “Consider Intangibles When Weighing Olympic Host City Benefits.” Sports Business Journal,
September 7, 2009, 12(13), p. 33.
Kortekaas, Vanessa. “Avoid London Ahead of Olympics, TfL Says.” Financial Times, June 12, 2012.
Preuss, Holger. The Economics of Staging the Olympics: A Comparison of the Games 1972-2008. Cheltenham, UK: Edward Elgar
Publishing, 2004.
Rose, Andrew K. and Spiegel, Mark M. “The Olympic Effect.” Working Paper No. 2009-06, Federal Reserve Bank of San Francisco,
March 27, 2009.
Smith, Helena. “Athens 2004 Olympics: What Happened After the Athletes Went Home?” The Guardian, May 9, 2012, p. 21.
Zimbalist, Andrew. “Economic Impact of Olympic Games Rarely Adds Up to Much Gold.” Sports Business Journal, August 1, 2005.
Zimbalist, Andrew. “Is It Worth It?” Finance and Development, March 2010, 47(1), pp. 8-11.

GLOSSARY
Crowding out: The situation in which increases in government spending lead to reductions in private spending.
Explicit cost: A cost that involves actually laying out money.
Implicit cost: A cost that does not require an outlay of money; it is measured by the value, in dollar terms, of foregone benefits.
Legacy benefits: Benefits that accrue over time.

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