Leisure time is necessary, sports offer experiences that contribute to relaxation. When government invests in sports and sporting facilities and events; there are various benefits: sports is healthy to the citizens, all levels of the industry have found out that exercise (for those participating in games) is vital to keeping fit, maintaining morale and increasing productivity. Sports contribute to economic benefit through direct and indirect employment in sports and sporting facilities, income from sports such as taxation by government, gate tickets collections during matches and from sale of recreation goods and services. Improved productivity associated with the physical and psychological individual benefits. Sports also generate benefits by attracting tourists (Pty, 1997).

Divergences in discount rates.

The construction of sporting facilities and programs can involve a large sum of money outlaid over an extensive period of time with benefits accruing far into the future. The planning horizon that is implicit in the evaluation of these proposals can have a big impact on the perceived attractiveness of these projects. Private investors may as well have a high discount rate than the community as a whole; this may mean that sporting programs that can make a potential positive contribution to the society will not be undertaken without some form of government intervention to prevent failures of such programs.

Information failure

Sports investments are also characterized by less than perfect information on both the costs and benefits involved. This less than perfect information could lead to a level of private investment that is either too high, or too low, from a social perspective, therefore information failure can be a rationale for government to ensure perfect information on both costs and benefits is delivered to private investors, in the right time.

Relationship between market failure and externalities of sports teams and sport events

There is a relationship between market failure and externalities generated by the activities of professional sports teams and the conduct of the sport events as highlighted below:

1. Sources of government revenue

Professional sports teams and sporting events are currently major sources of government revenue to the economy of any country hence market failure in sports can be a big blow to the economy of that particular country. Consider a case study of Australia.

Case study

The major sporting organization in Australia undertakes the significant economic activity in their own rights. For example, cricket Australia collected total revenue of eighty-seven million in 2003, the Australian rugby union had net revenues of more than sixty million dollars, and the Australian football league reported a net operating surplus of around fifteen million dollars for the same period.

2. Externalities (spillovers) of costs

Sports and sporting events is a public good and it can exhibit a unpredictable characteristics, firms may be uncomfortable financing special events, such as car racing, because they are unable to capture all of the benefits of funding the event, individual firms may fail to finance the events and still capture the benefit of business that the event generates, hence lack of financing can lead to market failure. Other examples of public goods and/or positive externalities include: local loyalty, fan loyalty and civil pride.

Satisfaction of living in a big league town and being able to view coverage of the events in the media causes direct demands for games that are experienced by sports teams to understate the total value of sports to the local consumer (Siegfied&Zimbalist, 2000). Nevertheless, sporting events can also cause negative externalities, such as lack of social cohesion.

3. Benefit of sports teams and events

Participating in sports as a team member or relaxing enjoying a sports event, for example football or car racing are both vital to keeping fit, maintaining morale and increasing productivity. Hence investing in sports can be beneficial in terms of community healthy as well as economic benefit. There are positive externalities as a result of sports for example direct and indirect employment in sports and sporting facilities, income and revenues from sporting events and sports, tourist attraction, on the other hand market failure can lead to negative externalities like low productivity, unhealthy citizens with low morale since they are not participating in sports and games, less revenue hence poor economy, unemployment, in other words loss of jobs affecting those working in the sports industry if sports market fails. Environmental pollutions and losses in tourist industry and the other industries linked to it for example hotels and transport sector. This can greatly affect the economy as a whole (Hone, 2003).