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Saturday, September 17, 2005

Are There Externailities In Baseball?

Are There Externailities In Baseball?

Before any discussion about whether or not baseball has externailities, lets define it. Textbooks will say that externalities are cost or benefits of market transactions not reflected in prices, which lead to third party benefits or harm. In my economics class it’s defined as unintentional, nonmarket, interdepence. J.C. Bradbury defined it as, "in market transactions, these slipovers, also known as externalities, lead to inefficiencies because prices do not accurately reflect the total social benefits and cost of actions."

The writer goes on to say that "while no direct market transactions between players occur in athletic contests, slipovers can enhance and diminish individual players performance." Now so far it’s nonmarket because there are no real direct transactions, and the players aren’t a buyer or a seller. Also the players themselves are interdependent of each other. If a pitcher throws a bad pitch, then the other players have to react and save the play. The pitcher relies on the other players to help him out. However, the other opposing team doesn’t necessarily depend on the pitcher, he wants to not depend on the pitcher. The unintentional part runs a thin line. The pitcher knows that the other players will help him out because it makes the team look good and their selves at the same time. However, one might see it more along the lines that the pitcher’s goal is to do the best he can with out ever relying on the other players. Gerald Scully wrote a paper in 1974 about baseball and economics and he stated, "individual performance carries with it no externalities, so that team’s performance is simply the linear summation of individual performances."

Bradbury instead goes on to talk about two forms of externalities in baseball, that he believes prove that there are externalities. One is called the "protection externality", which is expressed as, "results from a good on-deck batter forcing the pitcher to throw the current hitter more hittable pitches, yielding more hits and more hitting power." As far as I see it this means that the better the hitter coming up the harder the pitcher has to try with the current hitter, which tends to result in more hits. The other is "effort externality", which "occurs when a good on-deck batter causes the pitcher to use more effort to pitch to the current batter, thereby lowering the hit probability of the current batter." Again as I see it this means that the better the hitter coming up, the more effort the pitcher has to put forth on the current hitter and if he does so, the pitcher will lower the hit probability cause he is trying harder. Given the last statement, does the first externality even matter, or exist? It would make more sense that if a better hitter is up next, the pitcher would try to put forth more effort to strike out the current hitter, that way if for some reason they next hitter does get a hit, it won’t have as big an effect? Especially if the pitcher had walked the current hitter and the next hitter (the better one) did score, which creates even more of a problem for the opposing team. If we to assume that both effects did exist and mattered we would need to look to see if they cancel each other out. If they don’t then, "the sum of the external effects may influence individual batting statistics, thereby distorting marginal revenue product estimates derived from seasonal batting statistics."
It may be a bit of a far stretch, but I believe that the author has a point. Lets consider pollution for a second. It meets all the requirements of externalities. The effects of pollution, our negative externality, influence those who buy things that create pollution, as well as those you make the pollution. That in turn lowers the company’s revenues since no one is buying their product that when created made pollution, and when used creates even more. The same is true about Bradbury’s view on baseball. If either of those above listed externalities takes place there is likely to be an influence on the teams statistics, which lower the teams "credibility" and then lowers revenue. If the team in your city has bad overall statistics you probably are less likely to go to watch them cause you assume its going to be a bad game. Of course that leads to less revenue for the stadium and team. Also if we viewed it from a player’s standpoint, their statistics help get them picked by better teams and get more money, so those externalities mean something to them too.

Given that the suggestion being made that there are in fact externalities in baseball, one would assume that subsidies would be the next step to take to help fix the so-called "problem". The U.S. government has spent over $17 million dollars on financing stadiums for four professional sport leagues: hockey, baseball, basketball and football. About two thirds of that comes from taxpayers. Those taxpayers that decided going to watch their bad team wasn’t worth the money. In essence taxpayers are paying for the strikeouts, home runs, walks, fools, and so on that their team, and other teams get.
The questions I would like to put forth today are:

Do you believe there is truly externalities in baseball?
Should we really subsidize baseball to correct this negative externality?
If you do believe that subsidies are needed, can you tell me how you think we can possibly measure the MSB? How would the MEB be measured? Would it be by the ticket sales, or possibly a new stadium that was financed by taxpayers?

It seems to me that the social cost of paying more taxes for something I probably will never go enjoy. There have been studies done on what they call subsidies-to-victories ration (SVR). Generally speaking those teams that had new stadiums, or new improvements, built by more tax dollars had terrible seasons (like the Milwaukee Brewers had a 68-94 season), which resulted in a higher SVR. The teams that had less tax dollars spent had a lower SVR.

I believe that sports run a very thin line on whether they have externalities or not. I don’t think that the externalities, if any, have anything to do with the market in general. I also believe that there is no possible way to measure how bad baseball teams are effecting third parties. I think the government created a bad tax for baseball. I don’t think that player or team statistics can force the market to be inefficient.

Asserting that the players of the game of baseball experience externalities while they are engaged voluntarily in the game seems a bit silly. How can the actions of other players that you willing engage in the game with be experiencing externalities? That is like saying new competition arising from the establishment of a new shoe store is exerting an externality on other retailers.

Consider instead that perhaps government intervention in professional sports arises due issues revolving around monopolistic competition. What do you think?
As I said in my original post I believe the general idea of externalities as viewed in the article I read as being possible, however I agree that its a bit far sighted. I think its more along the lines of "externality abuse", but wondered if it could be possible.

As for the possibly of creating a monopoly, I would have to say yes based on the idea that the government's subsidies are allowing a commodity to be controlled by one party. I don't believe that the government has command over the supply of baseball. The don't control the prices or the league itself. Nor do they have legal privilege over baseball. The government does however act as though the major league and themselves are mutally agreeing on terms of certain actions. I don't accept that the government is creating a monopoly of baseball.

If you view it as the only source, then yes they are their own monopoly of the sport, but you can view it in other ways. You can see it as a sport being offered and you don't have to watch it because there are other sports. Also you are restricted to just going to the federally subsidies staduim to watch the sport. You can view it at home. You are offered opitions. Therefore, again, I believe its not a monopoly.
The purported source of externalities discussed in the linked article and Katie's post appear to me to be another example of externality abuse. The reason is sort of like Tateum's response, but not quite the way I would explain it.

Consider this question: Is there any decision maker who sees the effects of where players are inserted in the batting order? The answer should then explain why we don't see an externality with respect to batting order.

Tateum and Katie also discuss whether major league baseball is a monopoly. I think it clearly is, especially since there is a so-called "anti-trust exemption." Even without an exemption from anti-trust laws, baseball and all professional sports have substantial market (monopoly ) power. Would you expect such market power to decrease the number of teams in each league relative to the efficient number?

Katie also discusses subsidies to build sports stadia. Could there be a positive externality associated with professional sports games/teams that might justify a subsidy? I think there might be.
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