ABSTRACT

American cities and states have spent billions of dollars subsidizing facilities for professional sports teams. New facilities benefit the teams that occupy them by attracting more fans and offering more expensive premium seating and luxury boxes.

Cities subsidize facilities because they believe that the teams that occupy them provide positive externalities and can be public goods. Sports teams bring direct benefits to cities through local spending by fans that would not have occurred otherwise. Direct benefits can have a multiplier effect because local incomes rise from the initial spending, which induces more spending elsewhere in the local economy. Unfortunately, these benefits are generally small.

Cities use numerous mechanisms to raise the funds they need for facilities. Many cities try to export the burden by taxing goods and services used by out-of-towners. However, such taxes are generally paid at least in part by residents. Economists judge taxes according to their efficiency - the amount of deadweight loss they impose - and horizontal and vertical equity. Debt allows cities to spread the funding burden over future residents. It also enables them to raise funds more cheaply because the interest on municipal debt is typically tax exempt.