Sin & Neoclassical Economics

In the department of totally-unsurprising news, it turns out that gamblers tend to lose.  It’s enlightening to see the exact numbers, but not very enlightening.  It turns out that about 10% of the players contribute about 90% of the revenue – which sounds horrifying.  But in most consumer businesses, it’s very common for the top 10% to make up 70% or more of revenue.  This is actually a very common pattern – in my past life working with consumer businesses, it was very rare for the top 10% to make up less than a full half of revenue.  Seen in this light, casinos seem like a much less exceptional business than they’re often made out to be.  They’re an entertainment business, and some people are much more interested in their brand of entertainment than others.  I have no doubt that the numbers are similar for strip clubs, or for that matter for totally non-illicit nightclubs.  It’s less strong in movie theaters, but only because there are soft caps on how much you can spend – still, the overall pattern is no doubt there.

Of course, those other businesses aren’t seen as fountains of money the way that casinos are.  When discussing municipal casino licensing, this is often seen as a Faustian bargain – casinos bring in tons of money to cities, but they carry heavy non-fiscal costs.  They are often seen as local dis-amenities, bringing crime and drunkenness and so on.  Furthermore, people have reasonable qualms about cities profiting off the oft-compulsive behavior of gamblers.

A neoclassical economist would dismiss this concerns.  Firstly, he would decree the paternalism of restricting personal consumption choices, but that’s not very interesting.  More importantly, he would point out that the reasons that casinos can profit so much are due to their licensing-based supply constraints.  People will gamble no matter what, and if you can only gamble in Atlantic City or Vegas then the casinos will milk their relative lack of competition for all that it’s worth.    If gambling is permitted more widely, then the profit margins of the casinos will tighten and eventually evaporate, and the house takes will grow smaller and smaller.  People will still gamble just as much, but the odds will be much better and their compulsive behavior will be less harmful.

However, an astute paternalist will point out that this ruins the Faustian bargain.  Cities in general will see the fiscal benefit and move to license more casinos, which has been happening in the US.  If cities in general decide to license casinos, then the exorbitant profit margins will decline and take the municipal benefits with them.  So maybe the paternalists have a point – if casinos aren’t any more profitable in the long run than any other businesses then cities might as well choose to keep their hands clean and their consciences untroubled.

Neoclassical economic judgments don’t have to lead one to neoclassical policy solutions!