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The Social Costs of Gambling

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Abstract

Perhaps the most controversial issue surrounding the casino legalization debate is the “social costs” that accompany gambling. The casino industry maintains that its product is simply a form of entertainment like going to movies and football games, and consumers are willing to pay a price for entertainment. But many researchers argue that gambling is fundamentally different from other forms of entertainment because gambling, unlike movies and football games, can lead to addiction. As noted in Chap. 10, the prevalence rate of disordered gambling has been estimated to be between 0.4 and 2.0 % of the general population.

Keywords

  • Problem Gambling
  • Social Cost
  • Pathological Gambler
  • Government Spending
  • Indifference Curve

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

The material in this chapter is based on Walker DM, and AH Barnett. 1999. The social costs of gambling: An economic perspective. Journal of Gambling Studies 15(3): 181–212. Used with permission from Springer.

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Fig. 13.1
Fig. 13.2
Fig. 13.3

Notes

  1. 1.

    The development of gambling from “vice” to accepted entertainment is chronicled by McGowan (2001).

  2. 2.

    The social costs usually discussed in the literature refer to those caused primarily by disordered gamblers. This is what is meant by “social costs” and the “social costs of gambling.”

  3. 3.

    It is important to keep in mind that social costs need not result only from legal gambling. The discussion here is not meant to be limited to government-sanctioned forms of gambling.

  4. 4.

    Two such conferences were the Whistler Symposium (2000, Whistler, BC, Canada), the papers of which were published in Journal of Gambling Studies, 2003, and the 5th Annual Alberta Conference on Gambling Research (2006, Banff, Alberta, Canada), some papers from which were published in Smith, Hodgins, and Williams (2007).

  5. 5.

    Just as objective criteria are useful in estimating the prevalence of pathological gambling, objective criteria are important for the measurement of social costs. Harberger (1971, 785) makes this point in the context of welfare economics in general and cost–benefit analyses in particular: “Just as the road-construction standards that a team of highway engineers must meet can be checked by other highway engineers, so the exercise in applied welfare economics carried out by one team of economists should be subject to check by others.”

  6. 6.

    The concept is named for Vilfredo Pareto, an early twentieth-century economist. The Pareto criterion is the central concept in welfare economics. A full understanding of the meaning of social costs, as economists use the term, requires an understanding of this concept.

  7. 7.

    To be strictly correct, interpersonal utility comparisons are problematic. In applied welfare studies, economists nevertheless typically assume that all individuals have approximately identical utility functions. Given this assumption, it is possible to draw unambiguous welfare implications (i.e., measures of social benefits and costs) by aggregating individuals’ willingness to pay for policy changes.

  8. 8.

    For related discussions, see Baumol and Oates (1988), Bhagwati (1983), Bhagwati, Brecher, and Srinivasan (1984), Johnson (1991), Krueger (1974), Mueller (1989), Posner (1975), Tollison (1982), and Tullock (1967).

  9. 9.

    This type of exposition is used by Dixit and Grossman (1984). A slightly more technical presentation would include a discussion of relative prices, input coefficients, and preferences. See any intermediate microeconomics text for more details on the foundations of these models.

  10. 10.

    Grinols (2007) develops a model using two individuals’ utility functions that shows that, under his assumptions, one person stealing from another does lead to a reduction in aggregate utility. Thompson, Gazel, and Rickman (1999) make a similar argument.

  11. 11.

    Psychic costs are discussed in Sect. 13.4.3.

  12. 12.

    Behavior that involves attempts to obtain or prevent wealth transfers is generally referred to as “rent seeking” discussed in more detail in Chap. 15. Also see Johnson (1991) and Mueller (1989) for extensive discussions.

  13. 13.

    Becker argues that, in the case of a competitive crime market, the value of the resources used in producing locks and paying police can be assumed to approximate the social cost of the crime (1968, 171, note 3; italics added).

  14. 14.

    Dixit and Grossman (1984) use a similar example but do not show a contraction of the PPF. Carbaugh (2004, Chap. 2) explains that the axes in the PPF model give a scale for output per unit of input resource. Social costs effectively reduce productive capacity (given input endowments) since production is diverted to some other use, which would be unnecessary in the absence of theft.

  15. 15.

    In this discussion, we are ignoring any psychic costs to the victims of theft.

  16. 16.

    McGowan (1999) notes that this is a utilitarian interpretation of wealth transfers.

  17. 17.

    For example, see Grinols and Omorov (1996), Grinols and Mustard (2001, 2006), LaFalce (1994), and Thompson (1997).

  18. 18.

    Seminal work in this area was by Jacob Viner (1931).

  19. 19.

    The issue is a bit more complicated than the discussion here implies. Whether society’s wealth is reduced by the pollution depends upon whether the pollution is marginally relevant. For a discussion of the importance of marginally relevant externalities, see Barnett and Kaserman (1998).

  20. 20.

    The winners are a combination of other gamblers who win and the gaming industry involved.

  21. 21.

    This applies even when, for example, the now higher labor costs drive some existing firms out of business.

  22. 22.

    For more detailed discussions of externalities, particularly the distinction between pecuniary and technological externalities, see Barnett (1978, 1980), Barnett and Bradley (1981), Barnett and Kaserman (1998), and Baumol and Oates (1988, Chap. 3, especially p. 30).

  23. 23.

    Baumol and Oates (1988, 30) write, “the price effects that constitute pecuniary externalities are merely the normal competitive mechanism for the reallocation of resources in response to changes in demand or factor supplies.”

  24. 24.

    In addition, see “Casinos in Florida” (1995), Tannenwald (1995), and US House (The National Impact of Casino Gambling Proliferation 1995).

  25. 25.

    See Baumol and Oates (1988) for a complete discussion of externalities.

  26. 26.

    More recent comprehensive studies by NORC (1999) and the NGISC (1999) are similar in this respect.

  27. 27.

    It is for this reason that I have scrutinized their work.

  28. 28.

    Expenditures on police may also result in positive externalities. For example, an increased police presence on the streets may discourage some amount of crime.

  29. 29.

    This does not, however, imply that all government expenditures are social costs. (In many cases, such expenditures represent wealth transfers.)

  30. 30.

    There is an assumption here that pathological gambling occurs only when gambling is legal. Of course, this is not always the case. Society would likely have some of the social costs whether or not gambling was legal, since people could gamble online, in other jurisdictions, or illegally.

  31. 31.

    The value of psychic costs could be measured by asking individuals how much they would be willing to pay to avoid them. Surveys asking such questions would need to be very carefully constructed in order to be valid. This particular issue is beyond the scope of this book.

  32. 32.

    See ACIL (1999) on this issue.

  33. 33.

    Lesieur writes that he regrets publishing the article because he believes that many of the costs of problem gambling are not measurable.

  34. 34.

    Walker (2004) gives the example that a gambler bets an average of $1,000 in order to lose $100 at slot machines with a 90 % payout.

  35. 35.

    Grinols and Mustard (2001) resurrect the “abused dollars” concept, but define it differently than Politzer, Morrow, and Leavey (1985).

  36. 36.

    The argument that defaults on bad debts will lead to higher prices (interest rates, for example) and that this is a social cost is the result of misunderstanding the distinction between pecuniary and technological externalities. Any externalities that merely alter relative prices are pecuniary, not technological.

  37. 37.

    See “Casinos in Florida” (1995), Goodman (1995b), Kindt (1994), Politzer, Morrow, and Leavey (1985), and Thompson, Gazel, and Rickman (1997).

  38. 38.

    Consider a schoolboy who loses his money pitching pennies at recess. Rather than see him go without food, his mother may deliver a stiff lecture and replacement lunch money. The mother would certainly be displeased with his behavior but her “gift” is a voluntary transfer of wealth that does not constitute a decrease in social wealth and is not a social cost. Similarly, if her adult son is a pathological gambler and loses his own income gambling, she may choose to provide funds for his food and shelter. The wealth transfer would not constitute a social cost because her gift is purely a transfer and there is no loss in wealth for the community.

  39. 39.

    Alternatively, suppose one country compensates pathological gamblers 150 % of their treatment costs. Then the social costs of gambling in this country would be overestimated.

  40. 40.

    Alternatively, one could simply point out that if tax revenues, political contributions, etc. are not social costs, then certainly abused dollars, bad debts, and bailout costs cannot be.

  41. 41.

    The straight line PPF indicates that the “good,” i.e., money, is perfectly shiftable between individuals. In production cases, PPFs are bowed, as explained in the Appendix.

  42. 42.

    This discussion ignores a potential social cost associated with administering wealth transfers. With government transfer payments, for example, there is often a cost to collecting (and avoiding) the taxes. These are social costs of taxation.

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    Douglas M. Walker

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Walker, D.M. (2013). The Social Costs of Gambling. In: Casinonomics. Management for Professionals. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7123-3_13

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