Thursday, October 7, 2010

Election 2010: The Wood Village Casino Proposal

A curious economic analysis come out regarding the proposed casino in Wood Village suggesting that the casino would cause a net reduction in state revenues.  You might wonder how that could be and the answer is that it all comes down to monopoly rents.

You see the state is (with the exception of the tribal casinos that are generally more remote) a monopolist in the gambling industry in Oregon.  The Oregon lottery and all of the many games of chance that they administer is essentially the only routine gambling option for most Oregonians.  Now we can argue the ethics of the state being the provider of games of chance for money, but the reality is that they are a monopolist.

Like any good monopolist the Oregon Lottery tries to maximize total profit and as economic theory tells us, monopolists do so by restraining output and keeping the price high (or the odds low).  Since the good people of the state of Oregon have decided that the state should rightly be the monopolist in this endeavor so that the state can raise revenue, this monopoly behavior is good as it should yield the maximum revenue possible for the state.  Over the years as state revenues have dwindled from other sources such as property taxes, lottery revenues have become an important source of state funding for programs.

And the monopoly structure of the state has another benefit: as it in effect restricts the amount of gambling available to state residents it constrains the social cost of gambling.  The social cost of gambling are all of the costs born by society related to problems caused by compulsive gambling.  How serious is this problem?  The best study I could find that provided a careful economics-based meta analysis of gambiling costs and benefits found:

This literature shows that the extreme upper bound on annual total social benefits is $75 per adult. The lower bound for social costs, based on the estimates of costs associated with prevalence of problem and pathological gamblers, was between $140–$221 per adult. Consequently, the available research indicates that when using the highest estimates of benefits and the lowest estimates of costs, casino gambling fails a cost – benefit test by a ratio of 1.9 to one or greater.

So social costs are significant and important. Unfortunately these are costs that are not immediately visible ot society and, most importantly, not born by the private operators of casinos.  Note that even at the proposed 25% tax rate the casino would still fall far short of the true social cost of operating the casino.  In other words, 25% is not an optimal Pigovian tax.  

The state bears much, but not all, of the social cost of negative externalities associated with the lottery so in that case the incentives might be closer in alignment. However I doubt the other social service agencies have a lot of power to control what the lottery does.  But the mere fact that they are a monopolist is actually a good thing as it serves to restrict the supply of games of chance.

As always, we economists (especially the ones not being paid to make a case) should be humble about how much we can accurately predict the true future impact, but as a voter I have to take the best information I can and make a yea or nay judgement on the ballot.  I am choosing nay, but you should make up your own mind and I hope this helps a little in the understanding of some of the issues.

[As an aside, I miss the occasional lazy summer evening out at the old MKC (above) betting on the dogs.  Though I had to suppress the uneasiness I felt with the knowledge of how the dogs were treated, and I do not lament the closing of the place, I still have fond memories of those evenings]


BJCefola said...

How does the analysis look if you restrict your perspective to the local municipalities. Would they get a bigger cut of casino dollars then they get from the state lottery?

I could see this being something that made sense for some voters more then others depending on where they live.

Patrick Emerson said...

That is a good point, there could be a sense in which local municipalities can get a reward while imposing a negative externality on the rest of the state.

I am not an expert, but my reading of the literature seems to suggest that a lot of the costs of problem gambling are pretty local to the casino. So I suspect that there is not really an arbitrage opportunity here.