Reference no: EM131317919

A city with a population of 500,000 and 5% unemployment is considering building a stadium for a professional football team that plays in an old stadium the city owns. The proposal is for the city to pay $400M (M for million) to demolish the old stadium and have a new one built in its place. Of this expenditure, $250M would be spent on goods and services provided by city residents. The community for this analysis is the city. Its residents are called locals and all other people are outsiders. To pay for the project, the city would borrow $400M at 7% annual interest and raise its property tax so that, during the 40 year expected lifetime of the new stadium, residents would pay a total of $30M more per year than if the stadium were not built. The team owner, an outsider, would pay for maintenance of the stadium and would sell the tickets to games, parking, and concessions (food, drink, souvenirs, etc.), keeping 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, with a choke price of $110, and that locals will buy 100,000 tickets per year at an average price of $70 per ticket. Analysts estimate the team owner will sell a total of 0.5M tickets to games per year and that outsiders will spend an average of $50 per game ticket on restaurants, hotels, and other “game-related spending” for goods and services provided by city residents. Assume that the locals’ marginal propensity to consume local value added is 0.3 and that the average profit rate of local business and local labor is 0.2. Except in part g, 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. Compute the annual net user benefit (for locals) from the stadium project and the present value of the stream of net user benefits at 7% annual interest. Explain all your steps. b. Use the methods in the N5 notes to estimate the net generated income from the demolition of the old stadium and construction of new stadium. Do this by estimating (1) the net new spending on local value added for the demolition and construction alone, (2) a reasonable multiplier, and (3) the profit rate and combining these three numbers as described in the N5 notes. Explain all your steps. c. An economic impact statement distributed by supporters of the project claims that simply demolishing the old stadium and building the new one, without counting user benefits or benefits from game-related spending, would give the city about $625M in generated income (more than the construction cost). The impact statement estimate was obtained by taking the $250M to be spent on local value added for the demolition and construction and multiplying it by a multiplier of 2.5. Explain why the estimate of net generated income in part b is probably a better estimate of the net benefit city residents would get from the income generated by the demolition of the old stadium and construction of the new one. 1 d. Estimate the net generated income from the annual game-related spending and esti- mate the present value of the net generated income stream from game-related spending throughout the lifetime of the stadium. Explain all your steps in getting the estimates. e. What is your best estimate of the present value of the net benefit of the stadium project to the city residents, using the information above? Explain how you get this estimate. What information is missing that might improve your estimate? What would be the most likely effect of that information on the best estimate of the net benefit— would it raise or lower the net benefit estimate? Explain. f. Suppose that building the new stadium will raise the value of land owned by businesses near the stadium. Should this rise in property values be added to the estimate of the net benefit of the project in part e to get a more accurate estimate? Explain why or why not. g. The information given above could not really have been known for sure. Suppose that the numbers given in the description of the project are only the expected values of those variables whereas the actual numbers could be higher or lower. Explain a sensible way to adjust for this added uncertainty. Compare the present value of net benefit of the project, sensibly adjusted for the uncertainty, to your estimate in part f, being as specific as possible. Explain the difference between the two estimates. h. 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 others associated with the football team, owners of other businesses, local and nonlocal football fans and other people. Explain your answers. i. Should the following considerations affect a good estimate of the net benefit of the project? If so, in what direction should the estimate be revised? Explain your answers. (i1) The football team might continue to play in the old stadium even if a new stadium is not built. (i2) If the new stadium is built, the football team might stop playing there in less than 40 years. { can you please help me with this question in terms of public finance} ?