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A city with 4% unemployment and no inflation is considering building a new stadium for its professional football team

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A city with 4% unemployment and no inflation is considering building a new stadium for its professional football team. The team currently plays in an old stadium owned by the city. It would cost city $500M (M for million) to demolish the old stadium and build a new one at the same location, which the city owns. The new stadium would be expected to last for 40 years and the city would finance the costs of the project by borrowing at 6% annual interest and paying $35M per year for 40 years for all expenses, including maintenance and debt repayment. About $300M of the demolition and construction cost would be spent on labor and materials supplied by city residents (referred to as locals). The team owner, who is not a local, would pay the city $3M per year rent. The owner's company would sell tickets to games, parking, and concessions (food, drink, souvenirs, etc.) and keep the profits from those sales. Analysts estimate that if the stadium is built, the locals' demand curve for tickets to the games will be linear each year, with a choke price of $240, and that locals will buy 100,000 tickets per year from the team owner's company at an average price of $80 per ticket. Analysts estimate that outsiders who attend games will spend $20M per year on restaurants, hotels and other goods and services provided by city residents. Assume that the average profit rate of local businesses and local labor is 0.2 and that locals' marginal propensity to consume local value added is 0.3. Except in part h, below, assume that the analysts' estimates are correct. Except in part i, assume that the football team will leave the city if the new stadium is not built.


a.[10] Estimate the net generated income for the locals from the demolition of the old and construction of the new stadium alone, making reasonable assumptions about any other missing information. Explain all your steps. Translate this net generated income into annualized income for the residents at 6% annual interest.


b.[7] An economic impact analysis of the stadium project estimates that the demolition and construction alone would give the locals generated income of $600M (estimated to be the $300M spent on local value added times a multiplier of 2). List and explain the reasons why this "generated income" estimate is probably much higher than a reasonable estimate of the net generated income from the demolition and construction.


c.[6] Estimate the annual user benefit the locals would get from the project. Explain all your steps.
d.[5] Estimate the net generated income from the spending on local goods and services by outsiders who go to games at the new stadium. Explain all your steps.
e.[6] What are the most important other costs and benefits that should be included in a complete cost benefit analysis of the project but are not mentioned in the project's description above? Leaving those costs and benefits out, use your answers to parts a, c and d to give the most reasonable estimate of the annual net benefit to locals from the project with the given information. Explain all your steps.
f.[4] Business property values near the stadium are expected to rise once the construction is completed. Explain why this change in property values, in annualized form, probably should not be added to other numbers in the estimate of annual net benefit to locals from the project in part e.
g.[5] Which types of agents are the most likely to benefit from the project and which are most likely to lose? Consider, for example, the team owner and employees of the football team, owners of other businesses, local and nonlocal football fans and other people. Explain your answers.
h.[3] Suppose that the estimated values of the costs and spending listed above are only expected values and are not known for sure. How would that affect the desirability of the project for the city residents? Explain.
i.[6] Explain how your answers to parts a, c, d and e above would have to change under the following change in assumption: When considering building the new stadium, the city knows that the team would stay in the city and continue to play games in the old stadium if the new one were not built.


2.[7] Sometimes, when a worker gets more education, it allows her or him to help coworkers increase their productivity on the job. This is an example of an externality. Describe conditions under which the presence of this kind of externality increases the socially efficient level of education subsidies. Describe conditions under which presence of this kind of externality does not increase the socially efficient level of education subsidies. Explain.


3a.[6] Why is the current structure of benefits and funding for U.S. Social Security expected to be unsustainable without a change in the Social Security law? Give a complete set of reasons as you can.
b.[6] Suppose that the only change in the law is a single fixed percentage change in the benefits paid. Every recipient would receive a fixed percentage of the benefit they would receive under current law. Estimate that percentage under the assumption that it will be as close to 100% as possible. Explain how you get your estimate, explaining the main factors that the percentage depends on.