Back to school for research on value of Sydney harbour - The Centre for Independent Studies
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Back to school for research on value of Sydney harbour

Michael Potter

· Ideas@TheCentre

 27a61ce1-c0a0-44f1-9d1e-7ade943200feLast week we said politicians and media commentators should take remedial maths lessons for getting their tax reform sums wrong.

This time remedial economics lessons are needed, with an article stating that the value of Sydney harbour is (at least) $43 billion. This reporting is completely wrong (it appears as if the error was made by the media, not by the researchers at the Sydney Institute of Marine Science).

The article states that the research put a value of $40 billion on the “premium on real estate near the harbour”. It then takes the $40 billion figure and adds various annual revenues such as tourism, with a value of $1,025m per year, ports ($430m per year), and major events ($400m per year), plus a few other values, to generate an overall value of Sydney harbour of $43 billion.

If you can’t see the problem now, then go back to economics class…

The mistake in the article is that it has added a capital amount (the value of real estate) to a revenue amount (such as port revenue). This is a meaningless calculation, similar to calculating the value of Qantas by adding together its ticket revenues with the value of its planes. Or figuring out my economic value by adding together my annual income to the value of my house. In simple terms, you can’t add together the value of an asset and an income flow. To do the calculation correctly, you need to do a conversion: change the income flows into an asset value, or vice versa.

The article also includes the total revenue of businesses in the harbour, when in simplistic terms the calculation should include only the additional revenue of businesses due to proximity to the harbour. After all, most harbourside businesses could operate elsewhere, albeit with lower income. In addition, the article doesn’t note some double counting in the figures: for example, some port revenue may be counted in tourism expenditure.

As a result, the supposed value of Sydney harbour of $43 billion should be dismissed, and there should be a queue for Economics 101.