Journal Article

The economic analysis of lotteries

Ian Walker

in Economic Policy

Published on behalf of Center for Economic Studies of the University of Munich

Volume 13, issue 27, pages 358-401
Published in print October 1998 | ISSN: 0266-4658
Published online July 2014 | e-ISSN: 1468-0327 | DOI: https://dx.doi.org/10.1111/1468-0327.00036
The economic analysis of lotteries

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  • Economic Growth and Aggregate Productivity
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SUMMARY

Lotteries Determinants of ticket sales and the optimal payout rate

This paper considers policy issues arising in the design, regulation and taxation of lotteries, focusing on the market for an on‐line lottery game. Demand determines who buys lottery tickets and in what quantities. The design of lotteries affects the terms on which tickets are supplied.

UK data suggest that its lottery may be priced too high to maximize lottery revenue – more revenue might be raised if the proportion of sales allocated to tax and other levies were smaller.

Having established the positive economics of lotteries, the paper then assesses their welfare implications. Pari‐mutuel lotteries enjoy scale economies and, as natural monopolies, are invariably run either by government agencies or a regulated licensee. I estimate consumer surplus and identify the excess burden that arises from existing (over)taxation of lotteries. The large price elasticity of demand implies that revenue raised from the lottery is raised very inefficiently. Moreover, the demand for lottery tickets is inferior (and there is some evidence that such games are contagious and addictive). So using lotteries as a vehicle for raising revenue is extremely regressive.

Finally, I consider other policy implications: induced effects on charitable giving and on other forms of gambling; the impact on the government budget; perceptions of risk; and distributional considerations.

—Ian Walker

Journal Article.  0 words. 

Subjects: Economic Growth and Aggregate Productivity ; Financial Regulation ; Health, Education, and Welfare ; Labour and Demographic Economics ; Macroeconomics and Monetary Economics ; Public Economics ; Regional Government Analysis

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