THE ECONOMIC-ANALYSIS OF LOTTERIES

This paper considers policy issues arising in the design, regulation a nd taxation of lotteries, focusing on the market for an on-line lotter y game. Demand determines who buys lottery tickets and in what quantit ies, The design of lotteries affects the terms on which tickets are su pplied UK data suggest that its lottery may be Priced too high to maxi mize lottery revenue - more revenue might be raised if the proportion of sales allocated to tax and other levies were smaller. Having establ ished the positive economics of lotteries, the paper then assesses the ir welfare implications. Pari-mutuel lotteries enjoy scale economies a nd, as natural monopolies, are invariably run either by government age ncies or a regulated licensee. I estimate consumer surplus and identif y the excess burden that arises from existing (over)taxation of lotter ies. The large price elasticity of demand implies that revenue raised from the lottery is raised very inefficiently. Moreover, the demand fo r lottery tickets is inferior (and there is some evidence that such ga mes are contagious and addictive). So using lotteries as a vehicle for raising revenue is extremely regressive. Finally, I consider other po licy implications: induced effects on charitable giving and on other f orms of gambling; the impact on the government budget; Perceptions of risk; and distributional considerations..