Economics of Gambling

Introduction

In this chapter the economic interpretation of gambling is investigated.

Content of Chapters

1. The Scope of Gambling Worldwide

2. Why Gamble?

3. Why Tolerate Gambling?

4. Issues

a. Gambling as Economic Regenerator?

b. Social Costs

c. Illegal Betting

d. The Threat of the Internet?

e. Gambling as Social Engeneering

5. Conclusion

1. Scope of Gambling

The first chapter introduce gambling by defining the concept, what is gambling? What forms does it take? It identifies that gambling exist in both a legal and illegal form. The former is naturally more frequently investigated, as accurate data is easier to come about. Yet, illegal forms of gambling often constitute the alternative when policy makers consider prohibition or restrictions, making it of no less importance than the first. It also concludes that gambling as an activity always boils down to the activity of betting or wagering a bet. Money is being put in with the prospect of getting a higher return, at the same time risking a loss of the entire sum.

Furthermore the size of the gambling market is described. In 2001 US $859 billion was "handled" or wagered. After deducting the winnings, gross revenue is obtained, which was estimated to be about US $73 billion in 2003. The author also identifies a market growth with a "steady growth of wagering", and "sustained dominance of wagering in casinos and on gaming machines".

2. Why Gamble?

In the following chapter, the author tries to investigate the psychology of gambling and the possible economic mechanisms. Thus, the goal is to find out what motivates consumer behaviour of gambling.

To answer that question, the authors start with comparing the economic theory of gambling with the economic theory of consumer. The former is explained according to Expected Utility, the latter according to Risk aversion.

However, an inconsistency in gambling behaviour is soon identified. The paradox, which is derived from the theories, lies within the supposed double nature of the gambler. The gambler is at the same time risk averse, in other words she is willing to pay to reduce risk, which is normally the case among consumers (insurance policy etc.); and at the same time risk loving, in other words willing to pay to take on risk, which is the case when gambling.

An early theory that tried to explain this theoretical inconsistency was Friedman and Savage's (1948) solution. The idea was to differ higher stakes from lower. When the consumer risk substantial loss she is risk averse, but when she faces the opportunity of a life-changing gain, for example, jackpot, she is risk loving.

Then again, the question remains why the consumer would be interested in receiving small prizes, like in the case with slot machines. To aim for one big price would be more rational. However, Jackpots are seldom the only prize offered by game sellers, and seldom the sole interest of consumers.

The problem thus remains. It is derived that the approach of the expected utility theory, which considers gambling as speculative investment, may not give the entire picture.

Therefore, shifting the concept, the authors look for other theories that better explain consumption of gambling. Can it be so that gambling involves direct consumption benefits? Such an emphasis is found in studies from Forrest et al (2002), Kearney (2002), Farrell and Walker (1999). They develop an economic interpretation of gambling being perceived by the consumer as a good.

Thus, it is relevant to use the ordinary variables to investigate consumer demand: price, income, price of substitute goods and market size. The essential point now, instead becomes the price of a gamble.

Yet, the price of a gamble is not merely the price of the lottery ticket bought. The price also involves the expected return; it is therefore necessary to identify the effective price in order to evaluate demand. The expected value of winnings is for example expressed as "how much should be spent on gambling, on avarege, to make $1 return". This, in turn, gives the Take-out or the House advantage, as it is called in gambling jargon. It is identified to be one minus expected value of gamble.

The Take-out is then described in different gambles. It can be high or low (small or big chance of winning); and it can be static (constant over time) or non-static (varying), for example lottery due to a rollover - jackpot.

Demand is then thoroughly investigated. Dense microeconomic methodology is compared to empirical data, in a number of approaches:

Expected jackpot prize instead of effective price (Forrest et al. 2002).

The possible relation between higher incomes, higher demand for leisure and higher demand for variety of goods, among them gambling goods (Paton et al 2004).

Demand variation within gambling sector. For example, shift in demand from greyhound to football betting due to difference in demand among age categories.

Investigation of substitution effects is being presented. For example, between gambling and charitable giving, as lottery revenues are often partly given away to charity. This is, nevertheless, found to have no empirical effect (Tanner 2002). Furthermore, price substitution, where for instance, static effective prices, such as in the greyhound betting (were the odds can be very consistent throughout time), makes this evaluation hard. Finally, positive cross price elasticises are considered (Forrest et al, Paton et al), as well as empirical data suggesting "household lottery gambling [to] crowd out other household consumption by ca 2 %" (Kearney, 2002).

3. Why tolerate gambling

In this chapter a number of reasons had been presented that advocate gambling's positive influence on economy and society out which two main points for gambling were clearly defined:

* Effective tool for lowering fiscal deficit (better than raising taxes) - Gaining potential state tax revenues those outflows to neighbour gambling states. This was strongly supported by the theory that the states with higher tax burdens are prone to be lottery states as extra tax revenue is easier to capture from new source than by raising tax rate.

* Support