Tag Archives: Cost Benefit Analysis

World Cup – the economics of faking an injury.

As the World Cup enters the quarter final stage we have seen the same old tricks played by players to try and influence the decision of the referee.

  • France’s Lucas Hernandez admitted to flopping in France’s 2-1 win against Australia in an attempt to get Australian midfielder Mathew Leckie sent off.
  • Spanish defender Gerard Piqué accused Portugal’s captain Cristiano Ronaldo of exaggerating a fall to secure a penalty kick in their 3-3 nail-biter. Piqué said Ronaldo has a habit of “throwing himself to the ground.”
  • Neymar rolling around in what seemed to be excruciating pain when there was contact on his ankle and that was on the sideline. What would he have done if it was in the penalty area and Brazil were 0-1 down?

That being said it was hoped that the VAR system would start to see this sort of tactic removed from the ‘beautiful game’. Some of the techniques of faking an injury are below – HT to Kanchan Bandyopadhyay.

The Economist has looked at this area and I thought that I would delve a little deeper. There is no doubt that if you study the costs and benefits of faking an injury there are certain sports where it is perceived as quite worthwhile – i.e. the benefits outweigh the costs. Cost benefit analysis is part of Unit 3 of the AS Level course. What is cost-benefit analysis (CBA)?

Cost Benefit Analysis (CBA) refers to estimating the private and external benefits of an investment project – airport, rail link, road etc against the private and external costs. Once these costs/benefits are established a decision is made as to whether the project should go ahead.

CBA can be applied to any decision you make and below is a table outlining the cost and benefit of faking a peanalty or injury in particular sports. I see the benefit in soccer of diving in the box and being awarded a penalty outweigh the costs by a significant amount. Firstly, if the appeal for a penalty is turned down it is very unlikely that the referee will administer any punishment to the player faking a foul. In too many cases they are happy to let the game play on as they feel under so much pressure anyway for not awarding it. Whilst in ice-hockey a suspension of either 2 or 4 minutes has acted as a deterrent to those caught “embellishing” . I have put some values in the end column which will no doubt encourage a lot of discussion – remember Warren Gatland, the Welsh coach in the Rugby World Cup 2011, considered informing a player to fake an injury so there would be no pushing in the scrums. This was after their captain, Sam Warburton, was sent off early in semi-final against France.

However, with the perceived benefits of diving in soccer it does encourage players to even practice this activity. This reminded me of a great advertisement run by the Guardian Newspaper for the Euro 2004 Soccer Cup – see below

 

 

Army ants and cost–benefit trade-off

A HT to former A2 economics student Shelale Mazari for this piece on efficiency and ants. According to some research, they weigh up the costs and benefits and build bridges using their bodies to allow their fellow ants to forage for food. When it becomes inefficient for them to continue doing so – i.e. when there are not enough foragers – they withdraw. And apparently, they do all this without a lead ant.

Army ants (Eciton) form collective assemblages out of their own bodies to perform a variety of functions that benefit the entire colony. Field experiments show that the ants continuously modify their bridges, such that these structures lengthen, widen, and change position in response to traffic levels and environmental geometry. Ants initiate bridges where their path deviates from their incoming direction and move the bridges over time to create shortcuts over large gaps. The final position of the structure depended on the intensity of the traffic and the extent of path deviation and was influenced by a cost–benefit trade-off at the colony level, where the benefit of increased foraging trail efficiency was balanced by the cost of removing workers from the foraging pool to form the structure. To examine this trade-off, we quantified the geometric relationship between costs and benefits revealed by our experiments. We then constructed a model to determine the bridge location that maximized foraging rate, which qualitatively matched the observed movement of bridges. Our results highlight how animal self-assemblages can be dynamically modified in response to a group-level cost–benefit trade-off, without any individual unit’s having information on global benefits or costs.

Source: Army ants dynamically adjust living bridges in response to a cost–benefit trade-off

America’s Cup and Cost Benefit Analysis

There has been a lot talk about the impact of the America’s Cup and the economic impact it will have on the Auckland economy. Consultancies have suggested that the Cup could generate up to $1billion injected into the NZ economy, thousands of jobs created, a return of more than seven dollars on every dollar invested in new wharf facilities. These figures have come under criticism by Tim Hazeldene in the NZ Herald.

As for the value-added injection and the jobs created: to a first-order approximation, the net number of new jobs created in Auckland, with its already stretched construction and tourism industries, will be about zero. The workers needed will be bid away from other jobs, or imported as new immigrants. As a result, there will be no significant real output increases, the extra spending will be soaked up in higher prices.

Higher prices are harmful for domestic New Zealand customers and travellers but beneficial to the bottom lines of New Zealand and foreign owned businesses. It’s a trade-off. My expectation is that, overall, there will be net economic benefits from holding the Cup in Auckland but that they will be quite small — below the costs to which national and local government are being asked to contribute.

The economic impact is based a lot on the multiplier effect but the use of cost benefit analysis also considers those external costs and benefits which are not easily convertible into a monetary value.

Evaluation of CBA
It is clearly more efficient for public spending to be subject to rigorous analysis, rather than based on the whims of politicians. However, there are a number of criticisms of CBA, including:

1. It is often very costly to undertake, though usually this forms a very small proportion of total project spending.
2. Assessing the monetary value of external costs and benefits is often very difficult. What precisely is the value of the congestion that would be reduced if a new bi-pass were built around a busy town? How much extra tourist revenue will actually be gained from a new airport? How long will the building be used as a venue, as in the case of the Viaduct area in Auckland for the 2020 America’s Cup. One solution to this problem is shadow pricing, where analysts attempt to place a value on the costs and benefits of a decision or a project where an actual market price does not exist.
3. Changing circumstances can make initial projections appear grossly inaccurate. The Wembley Stadium project in London went considerably over-budget, and the majority Olympic Games are far more costly than originally estimated. For instance the Montreal Olympics in 1976 was eventually paid off in December 2006. Higher interest and inflation rates, and falling exchange rates can all dramatically affect costs.
4. Actual costs can also rise above planned costs as a result of moral hazard, where project managers go over budget because they expect that those who fund the project will make extra funds available, providing an insurance against their over-spending.
5. Ultimately, decisions to go ahead with projects are only guided by CBA, leaving politicians to make the final decision. Politicians are free, of course, to ignore the results of an appraisal.

If you have read the book Circus Maximus you will no doubt be aware that most big sporting events run over budget and in some cases don’t generate the benefits until well after the event if at all. So just because an event runs over budget is that enough to say that we shouldn’t go ahead with the event. There are a great many other benefits of hosting an event like the Americas Cup which are not measured by GDP. The sense of community and wellbeing that comes from New Zealanders performance whether it be in rugby or at the Olympics. It tends to bring people together feel a sense of belonging which has external benefits. More recently the NZ government have introduced the Treasury Living Standards Framework – LSF

The Living Standards Framework

The Treasury Living Standards Framework draws on international work to supplement income based on measures of well being. So as well as GDP – which tends to be the standard indicator as to the health of an economy – other indicators such as:

Natural Capital – land, soil, water, plants and animals
Human Capital – skills, knowledge and physical and mental health
Social Capital – Trust, rule of law, cultural identity
Financial and Physical Capital – Houses, roads, buildings, hospitals etc.

So how will the above be impacted by the America’s Cup in Auckland?

Externalities: Kramer’s Welfare

From The Economics of Seinfeld website. Useful look at externalities and cost-benefit analysis.

A Kenny Rogers Roaster restaurant opens across the street from Kramer. He can’t stand the red glare from Kenny’s neon sign, and moves into Jerry’s apartment. But he becomes hooked on Kenny’s chicken, and eventually accepts the red glare in exchange for access to the chicken. When Kenny’s shuts down, the lights go out, and Kramer’s overall welfare falls—the benefits of the chicken outweighed the cost of the glare.

Nutrient emission reduction scenarios in the North Sea – Cost of Reduction v Cost of Damage.

Last week I attended a PD for Teachers hosted by the University of Waikato Economics Department. Amongst the presentations was one on Developments in Environmental Policy. Questions were asked as to what is the Economic Way of Thinking about Pollution:

* What is the ‘efficient’ level of pollution?
* Rarely zero – choices have to be made* How should we get there?
* How can this be achieved at least cost?
* Who should bear the cost?

One particular example that was presented was the “Nutrient emissions reduction scenarios in the North Sea”. Ultimately for economists it is a cost benefit analysis with – Marginal Abatement Costs v Marginal Damage Costs (See graph below).

Theoretical representation of different management positions based on economic considerations and different interpretations of the precautionary principle (assuming that all cost can be expressed in monetary terms). Marginal abatement costs (ranging between AC1 and AC2) and marginal damage costs to the environment (ranging between DC1 and DC2) are shown

MDC v MAC

The letters on the horizontal axis represent the following:

A = Strict Precautionary Principle (As near as possible to pristine condition)
B = Precautionary Principle implemented through the best available technology
B – C = Safety Margin
C – E = Risk threshold zone of uncertainty
D = Implementation of the best available technology not entailed excessive costs for society
F – G = Economic Optimal zone
H = Implementation of the best available technology not entailing excessive private costs