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Friday, November 25, 2005

Government and Gaming Regulations

I’m spending Thanksgiving week in Las Vegas and wondered why government regulates gaming. I’m sure there is some historical explanation having something to do with reducing organized crime’s influence on gaming, but from the framework of economic efficiency is such government regulation appropriate?

The good in the gaming market is the gamble and the price is the bet of that gamble. For example, when I bet $25 at the blackjack table that is the price I pay to play the game, or gamble, where playing the game is the good I am consuming.

From the framework of economic efficiency there may be a role for government when the market fails to provide a public good, or a monopoly or an externality is present. Does any of this apply the gaming industry?

Let’s start with monopoly. No monopoly exists in the gaming industry. There are plenty of casinos in downtown Vegas and even more on the Vegas Strip. There are casinos all over the state of Nevada as a matter of fact, so monopoly doesn't apply.

The model of a public good doesn’t apply either since gambling is both excludable and rival. Gambling is rival as it requires money. Gambling is also excludable. For example, only six people can play at a blackjack table. And only one person at time can play a slot machine.

I don’t think there are externalities in gambling either. Certainly there are no positive externalities. I just can’t see how someone besides me or the casino would benefit from my gambling. I don’t think there are any negative externalities either. Although there are individuals who might claim my gambling bothers them on some moral ground, I’m not concerned with their preferences. I am concerned only with the preferences of the individuals involved in the transaction, not those outside of it.

Monopoly? No. Pubic good? No. Externalities? No. This suggests government should refrain from intervening in the gaming market.

However, not all economists would agree with this. As Prof. Eubanks has mentioned in class some economists hold that asymmetric information is a source of market failure. If you find this to be a source of market failure then there probably is a role for government in the gaming market. Gamblers don’t know if the casino is rigging slot machines to never pay out, or if card dealers are trained to deal cards so the house always wins. Government is needed to ensure gamblers have the same information that casinos have.

What do you think? Should we consider asymmetric information as a source of market failure?

Comments:
I think that there are some negative economic consquences of large scale gambling.

Some people become addicted to it and make irrational decisions. It is regulated for similar reasons to regulation of alcohol, seatbelt use, and helmet use. This is generally justified in part because we have chosen to help pick up the mess when people rashly hazard their lives and livelihood. If we were willing to turn the destitute away from our emergency rooms and hospitals, this would be less of an direct economic issue.

This is in addition to the correlation of gambling with various forms of illegal behavior which are expensive to deal with such as theft, loan sharking, prostitution and illegal use of drugs.

Very similar reasons to those used to justify banning recreational narcotics. In fact, many states ban large scale gambling entirely unless they get a cut (state lotteries).
 
You write,

Some people become addicted to it and make irrational decisions.

In economics we take preferences as given. This means that no decision made is ever irrational if the individual making the decisions weighs costs and benefits and acts in order to maximize his or her utility. It may seem to you that addicted gamblers are making irrational decisions, but to the gambler he is simply maximizing his personal utility in a manner inconsistent with the way you might maximize your personal utility.

You also note that,

It is regulated for similar reasons to regulation of alcohol, seatbelt use, and helmet use. This is generally justified in part because we have chosen to help pick up the mess when people rashly hazard their lives and livelihood.

Alcohol, seatbelt and helmet use are not regulated with economic justifications, rather they are regulated with police power which is justified from a constitutional framework, not an economic framework. Gaming regulations at the state level are certainly justified within the constitutional framework as such regulation would fall under the police power which allows for state governments, via the Tenth Amendment, to regulate public health, safety, and morals. But from the framework of economic efficiency government regulation of the gaming industry is only justified when the market fails.

I would also like to point out that I’m not sure that refraining to wear a seatbelt produces negative externalities. If I don’t wear my seatbelt then I am the person harmed. I’m not sure how an injury sustained by me exerts negative externalities. If it did the solution from the economic efficiency point of view would be to tax those who don’t wear their seatbelt. This seems a bit silly in practice, so seatbelt laws were made mandatory. Empirical evidence suggests that after mandatory seatbelt laws were instituted the same percentage of drivers were getting into accidents while pedestrian deaths rose. It sounds like the negative externality might come from those who wear seatbelts, not from those who refrain from wearing them. Nevertheless, seatbelt use regulation really falls under the police powers, like gaming, alcohol and helmet use.
 
I think you dismiss externalities too swiftly. You say, "Although there are individuals who might claim my gambling bothers them on some moral ground, I’m not concerned with their preferences." If these people were harmed they are now on a lower indifference curve. And how do we derive that curve?
 
We could play the my actions "harm" other people because their preferences aren't in line with mine game all day. Many decisions made by others bother me every day.

It bothers me that Mr. Perv can make computer generated child pornography and sell it, thus I find myself on a lower indifference curve. Well, it probably bothers Mr. Perv that I don't approve of his business, and he finds himself on a lower indifference curve. Who's really harmed? Who's change in utility was the greatest? Was it Mr. Perv or me who suffered the greatest loss in utility? Or does the harm we exert on one another balance out?

These are silly questions for an economist to ask because the harm we are talking about is impossible to measure with any accuracy. That is why within the framework of economic efficiency we take individual preferences as given. We economists don't judge others, we subscribe to the policy of live and let live.
 
Actually it is because we take preferences as given that we economists have to try make silly judgments (under the normative framework of economic efficiency) like trying to weigh who would be harmed more. Under efficiency economist chase the elusive condition of Pareto allocation. Maybe economic efficiency isn't all that it's cracked up to be, or then again maybe it is.
 
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