Monday, February 10, 2014

Some Examples of External Diseconomies from Sochi 2014

Staging the 2014 Winter Olympics in Sochi, Russia has cost $51 billion. This cost is what Russian authorities paid to their contactors. Is this what it really costs to stage these Games? I use this event to illustrate the concept of external diseconomy.

In the post titled Olympics and Economics, I wrote on how Olympics can be viewed as economic events. Governments and businesses in choosing to stage or promote Olympics make economic decisions. As a matter of fact, building an Olympic Park and roads, designing new items for Olympic supporters, sponsoring Olympics, and bidding an amount of money for the exclusive rights to broadcast the Games in a region are all well and truly economic decisions taken after assessing their costs and benefits.  

The cost of staging the 2014 Winter Olympics and Paralympics in Sochi adds up to $51 billion. This amount is only what Russian authorities paid contractors for delivering the Olympic infrastructure, constructing new roads … It does not include inconveniences underwent by the local population due to environmental and people’s rights’ violation. These inconveniences are called external diseconomies or external costs.

Basically, external diseconomies are uncompensated costs unwillingly incurred by people as a result of some other people economic decisions. Sochi 2014 abounds with examples of external diseconomies.  Here are four of them.

Expropriation – Several people living around the Olympic Park were expelled from their homes without any financial compensation. Some of them became homeless after the demolition of their houses and the luckiest ones were rehoused in very tiny apartments. Local entrepreneurs were compelled to sell profitable businesses at very low prices to Russian oficials.

Open Waste Dumps – Despite the pledge of Russian authorities, construction waste from the Olympic site were dumped inside Sochi National Park. This protected area is Russia second oldest national park.  The items dumped include slabs of concrete, tires, cans of sprays, and foam boards.

Water Pollution – A nearby stream called Bitha connects the open waste dumps in Sochi National Park to the Black Sea. Chemical products and other waste flow this way into the water killing fish and causing diseases. 
Moreover, to link the airport to the Olympic venues, a new road and a railway have been built alongside the River Mzymta. This is destroying the ecosystem of this river that is the source for drinking water for Sochi.

Embezzlement – The final cost of staging the Games is nearly twice the initial estimates. This cost overrun is attributed to corruption and frauds.