Much could be and has been written about the problems facing the Summer Olympic Games in Rio thanks to polluted water venues, substandard housing for athletes, Zika, crime, transportation, and Brazil’s overall financial problems.
Beyond and behind these headlines, though, lay fundamental (and interesting) issues of political economy.
The Olympic Games are costly, with large outlays for venues and infrastructure. Estimates range around $4 billion for Rio (which is very modest as Summer Games go and may help to explain some of the dysfunction as Brazil is trying to get by “on the cheap” as discussed in a CNBC article).
The Games also generate sizable revenues from television rights and expenditures by visitors, but less than the expenditures. As a result, governments almost always subsidize the games.
In Brazil, the government is covering an estimated 30 percent of the expense.

Making the Olympics (More) Affordable

These costs can be mitigated, somewhat, when the Games take place in locations where existing facilities can be utilized as venues or new facilities can be repurposed for long-term use. For example:

• Turner Field in Atlanta has been used (with modifications) as the Braves’ home for the past twenty years.
• The Olympic Stadium in London has been modified and will now serve as the home to West Ham United of the Barclay’s Premier League.
• The Aquatics Center in London is not only used for competitions; it is widely used by recreational swimmers who rent lane time.

Also, the costs can be defrayed or spread over time where the pre-existing infrastructure is capable of handling the Games with relatively modest additions, or where additions wind up being extensively utilized after the Games. Again, London’s Canary Wharf area is an example.
This is where the choice of a location such as Rio is problematic.

The 2016 Summer Olympics vs. Brazil’s Financial Crisis

Given Brazil’s lack of economic development, there is a higher likelihood of sporting venues and infrastructure projects becoming white elephants. An example is the “train to nowhere” project reported by The Wall Street Journal.
These issues arose when Brazil hosted the FIFA World Cup in 2014, but the scale of that tournament was modest in comparison to the Olympics. There were less than 1000 athletes for the World Cup, while there are more than 10,000 athletes participating in the 2016 Olympics in 28 sports.
Furthermore, countries like Brazil or Greece place a much larger financial burden on their citizens than wealthier countries do, relative to personal income.
Think about it: Adjusted for purchasing power, Brazil’s GDP is about $14,000 per person compared with $55,000 for the US, $41,000 for the UK, and $37,000 for Japan by World Bank figures.
At least Brazil’s population is large (200 million), so its modest GDP per person translates into an economy-wide GDP of $1.5 trillion. That figure, though, is still well below the GDP of the UK at $2.7 trillion and far below the U.S. at $18 trillion. Greece’s GDP per person in 2004 was about $25,000 but with a small population (11 million), its $11 billion expenditure amounted to about four percent of its annual GDP.

Why the Countries with the Worst Financial Situations Get to Host the Olympics

So how do the games wind up in a place where the economics are so ill-suited to hosting them?
That question is part of the political economy story. Just like soccer’s international association, FIFA, the International Olympic Committee (IOC) is headquartered in Switzerland and operates much like a sovereign nation—a corrupt third-world nation, that is.
The power and corruption arises because the IOC controls a very valuable event from which it extracts payments in terms of rights for hosting the game. It oversees country associations, but its residence in Switzerland (and the blind eye of authorities there) has permitted it (as well as FIFA) to operate with little regard for laws regarding bribery or transparency (worries of which have been longstanding).
It’s easy to see how a country’s willingness to provide special favors to the IOC could trump its economic preparedness to host the Olympics.
These kinds of suspicions are not easily proven, however. The choice of locations where government corruption is rife like Brazil (World Cup and Summer Olympics) or where autocratic governments like China (Summer and now Winter Olympics), Russia (Winter Olympics and World Cup), or Qatar (World Cup) can make illicit payments with impunity heighten suspicion. The existence of payments and the difficulty of proving them is highlighted in the recent investigation of FIFA, detailed in an ESPN article.
Government subsidization of sporting events will always be controversial whether it involves stadium projects or the Olympic Games, particularly among those who believe in limiting government activity as much as possible.
Such expenditures can rarely justify themselves when we compare direct revenues to expenditures.

The Non-Financial Benefits of Hosting the Olympics

Yet, there are sizable intangible values associated with sports. These are evidenced by Monday morning conversations about a football game, Usain Bolt’s world record, and fantasy leagues.
Such benefits became very apparent when hundreds of thousands of Canadians turned out in the streets to celebrate Canada’s gold medal in hockey in the 2010 Vancouver Olympics. Not only do these intangible values accrue to fans, but they can also flow to citizens of host countries who feel pride and joy. The Canada celebrations seemed to be a mix of both.
The political economy problem is that even if there are sizable intangible values in hosting the Games, they aren’t felt by those who don’t care about sports or the Olympics. Yet, the tax dollars of those people are lumped in with the money of those who do feel the benefit.

Using the Economy to Fix the Problems Associated with the Olympics

The “free rider problem” has long been used to validate the use of taxation where these kinds of intangible values (positive externalities) exist.
However, the development of services like Wikipedia or crowdfunding examples indicates that maybe the free-rider problem, while present, may be overstated. Technological innovation has allowed many people to express their underlying preferences.
These are not realistic options for Brazil, though. It has no business hosting the games, given its modest level of economic development. Doing so, and subsidizing them with tax dollars, only boosts the resentment of many Brazilians as their government pushes them farther into economic crisis.
Alternatives to government subsidization might be an option for first world countries such as Japan that will be hosting the 2020 Summer Games. These alternatives provide a means for citizens who support the hosting of the games to financially back them without putting an additional tax burden on citizens who do not.