Description of the Relevant Economic Theory to Explain the Effects of Gambling on Economic Efficiency

Discuss About The Economic Analysis Consumption Of Gambling?

The addiction to poker machines gambling is a big societal problem in Australian society. Australia has more poker machines a person than any economy in the world, excluding casino-tourism destination including Macau and Monaco. Australia has close to 200,000 poker machines-one for every one-hundred and fourteen individuals following the wave of pokie liberalization in the course of 1990s that saw machines ushered in pubs and clubs in each state and territory with an exception of Western Australia.

The minimum current annual losses on pokies in clubs and pubs for Australia amount to 638 dollars per adult with highest losses witnessed in NSW at 978 dollars an adult while Tasmania recording the lowest per adult at 283 dollars- though casinos play a key role in Tasmania. Such statistics remain extremely high by world standards. The Australian losses on pokies outside of casinos dwarf the losses of any other comparable economy. [1] These loses are 2.40 times higher than the ones for Italy, Australia’s closest rival. Surprisingly, these numbers remain even extremely anomalous in comparison to non-casino gambling machines observed in other English-speaking economies. Australia lose 3-times more than New Zealanders, 4.10-times more than Canadians, 7.50-times more than British, 9.80-times more than Americans and 6.40-times more than Irish.

The problem is even more compounded as some have reported having lost their children to pokies triggering endless calls to reduce the pokie machines as gambling problems linked to pokie machines spirals. Many have struggled to battle the fierce addiction to poker machines as families are left torn apart due to gambling. The pokie machines have been said for addiction since they affect the brain like the drugs as the designers ensure the machines are created in a manner that gamblers stay on as long as feasible leaving them in a hypnotic state on pokie machines.

The state regulators and Federal Government have only focused on “problem gambling” and hence solely look at people who have “fallen off a cliff” already. The NSW for example, has ½ of Australia’s pokie machines and 10% of total globally, at about 95,000. Gamblers sometimes feed in as much as 7,000 dollars into just a single pokie machine, with roughly 8.270 billion dollars gambled on these machines in Fairfield and 80.0 billion dollars gambled across NSW in the 2015/2016. This stood at about 55% of the national total gambled on these machines that stood at 135.70 billion dollars in 2014/2015.

Cost and Benefits of Problem Gambling

Gambling is indeed a societal problem due to its spill overs. For every ‘problem gambler’ for example, 6 individuals are affected whereas for every ‘moderate risk’ gambler, around 3 people remain impacted and for every ‘low-risk’ gambler, one individual is adversely impacted. The Productivity Commission puts the social costs linked to gambling at 4.70 billion dollars per year. The Productivity Commission inquiry holds that in the presence of such an enormous social cost linked to gambling, the policy measures culminating in modest decrease in gambling might be essentially worthwhile. [2]

Pokies are designated to take gambler’s money as the machines remain cleverly designated to earn revenue for the owners of the venue, not to provide any win for the gamblers. The structure as well as the design of a poker machine is capable of tricking the gambler into thinking that he is not betting much money and hence lacks ‘anything to lose’. A single cent machine remains a typical example. Such machines disrupts the financial judgment of the gamble about how much is really being lost, by making it seem like only a small amount of money is involved.

Gambling has further culminated in social and economic costs to individuals and families alongside communities. These cost include traffic congestion, environmental effects, demand for additional public infrastructure/services (fire protection, police, roads, and schools), increased crime, local residents’ displacement, problem /pathological gambling. Problem gambling contributes to bad debts and bankruptcy thereby increasing the cost of credit throughout the Australian economy.  

Overconsumption of gambling remains a serious threat to the Australian economy prosperity. The problem remains compounded by the difficulty to determine or set the safe levels of gambling, where individuals can enjoy gambling recreation without causing themselves/others harms via overspending. Overconsumption of gambling is not only non-entertaining but also harmful to both gamblers and others by extension of their addiction. [3] Overconsumption of gambling products is called problem gambling as people with such a problem tend to consume too much additional products that trigger some harms including unhealthy food, tobacco, and alcohol alongside illicit substance. Such an overconsumption can lead to the destruction of an individual’s physical health as well as mental well-being. 

The economic analysis of overconsumption of gambling will be underpinned by gambling cost/benefit analysis as the economic theory.   This analytical method will remain a correct theoretical economic model for this economic analysis when explained on the basis of economic relevant economic terminology. The overconsumption of gambling can best be understood with respect to both social and economic costs. The phrase ‘costs’ is used here to encompass the negative consequences of pathological/problem gambling for the gamblers, their immediate social environments as well as the larger society/community.

Negative Externalities and Market Failure

Accordingly, the fundamental policy question here becomes whether the gambling benefits or the costs are enormous and by how much. This theoretically can be determined with benefit-cost analysis model already identified. Complicating this analysis, nonetheless, is the fact that social as well as economic effects remains extremely difficult to measure. [4] This is specifically true for the intangible social costs like emotional pain and additional losses experienced by pathological/problem gambler’s members of the family, and the employees’ productivity losses who are problem/pathological gamblers. The beneficial effects can as well be challenging to measure and, as with costs, are able to vary in kind and magnitude crossways time and venues of gambling together with as kind of gambling. [5]     

It remains imperative to ask the fundamental benefit against cost question for every form of gambling in this case, pokie machine, and consider such economic factors as real costs against economic transfers, direct and indirect effects, tangible and intangible effects, future and present values, losses and gains witnessed by various cohorts in array of settings. The cost and benefits of problem gambling must be considered in the footing of the entire effects of gambling on the society. [6] 

From above analysis of the social costs and social benefits of the overconsumption, it is apparent that it leads to negative externalities and hence market failure or economic inefficiency. [7]The social cost surpasses the social benefits due to spillages from pokie machine gambling that are designed to take money from the gamblers as only the private owners of the venues benefit at the expense of the society. The gamblers are overconsuming the products or services for which no appropriate compensation is paid. [8]

In this sense, the negative externality created occurring outside of the market by affecting individuals (family members, community) indirectly involved in production/consumption of the gambling services also called spill-over effects.

 In this sense, the social costs will surpass private cost leading to over-consumption of gambling products as the venue holders acquire more machines by ignoring the externalities. The external cost will arise from the overconsumption leading to consumption externalities that are generated and subsequently received in consumption. These negative consumption externalities culminate to a situation whereby the social benefits of consumption becomes less than the private benefit.

 (i) Pigouvian Tax

Policy Overview

            A Pigouvian tax is that which is imposed on anything, activity, or product which has a social cost. The common Pigouvian taxes include tax on gambling establishments. [9]

Conclusion

How it work to reduce gambling

            The Pigouvian taxes need to be imposed on poker machine activities to weaken its external-cost. The tax will lift the social-welfare in external and local communities via poker machine with gamblers incurring particular private-losses as a result of corresponding tax-burdens. Tax will alleviate the unbalanced growth of biased gaming through resource reallocation, and thus improving the ToT (terms of trade) for enhancement of local welfare via gambling. [10]

Where taxes are collected from poker machine venue owners but not refunded fully, domestic tax policy will play the double roles of decreasing social cost as well as generation of public revenue. The importance of Poker Machine Pigouvian taxation for preventing the ‘exported’ social-cost from returning to hurting domestic economy, for extremely much these exportation could provoke restrictions on visa policy by gamblers native communities.

The above diagram illusrates Pigouvian tax. The marginal benefit curve (MB) denotes marginal benefit of poker machine owner for each level of production that diminishes as amount of output rises. The marginal private cost curve (MPC) indicates marginal cost (MC) of venue owners of poker machine as output sales. The more poker machines produces, the more it causes negative externality to gamblers, community and familiy members thus the greater negative effects denoted by marginal damge curve (MD). Marginal social cost (MSC) denotes the total marginal cost for entire society, and remains construced by summing up private cost (direclt translatig to greater prices) and social costs. The Pigouvian tax will thus be imposed to eliminate the engative externality denoted by E thereby reducing output to Qs from QA increasing price to Ps, the socilaly efficinet equilibrium. [11]

• The strength is that it is considered win-win policy since not only does it discourage unhealthy behavior, it helps pay for such behavior consequences.
• It levies a tax equal to externalized costs thus corrects the negative externality
• A limitation is that it is ineffective in presence of social cost problem since negative externality does not essentially culminate in an inefficient outcome and Pigouvian tax does not tend to an efficient outcome

 (ii) Quota on Poker Machines

This is a trade-restriction imposed by government thereby limiting the quantity/monetary value, of products/services which can be exported or imported in the course of a specific time period. They can be imposed on particular service/goods to reduce imports hence increasing local production thus helping in the protection of production/consumption by restricting foreign competition.

The quota amount impossed above is denoted by Q2 to Q3 making the domestic output share to increase to 0 to Q2, plus Q3 to Q4 as shown below:

This quota establsihes a relative shortage of gumbling servies and drives price to P2 and total output diminishing to Q4.

Quota will reduce gambling by limiting the number of poker machine venues by imposing protective measures that focus on the provision of limits by defining quantities of a poker machines that will be accepted.

• The potential strength is that it has a precise outcome and more flexible and easy to be imposed and removed
• The limitation is that a quota generates no revenue to the government

(iii) Non-Price Policy

The behavior change can be used to dissuade people from participating in gambling. This will reduce the addiction from set in and hence a person will only gamble as a form of entertainment and not to get money.

The policy will dissuade people not to participate in gambling and hence will automatically reduce it.

• The strength is that many people will stop gambling and engage in other productive activities
• The limitation will be that it might not convince the addicts easily and hence ineffective

References

Gahvari, F. (2014). Second-best pigouvian taxation: a clarification. Environmental and Resource Economics, 59(4), 525-535.

https://www.pc.gov.au/inquiries/completed/gambling-2009/report

Livingstone, C. (2017). Pokies, sport and racing harm 41% of monthly gamblers: survey. The Conversation, August 2. Retrieved from https://theconversation.com/pokies-sport-and-racing-harm-41-of-monthly- gamblers-survey-81486

Productivity Commission (2010) Gambling: volume 1 and 2. Report no. 50, Canberra.

Raupach, M. R., Davis, S. J., Peters, G. P., Andrew, R. M., Canadell, J. G., Ciais, P., … & Le Quere, C. (2014). Sharing a quota on cumulative carbon emissions. Nature Climate Change, 4(10), 873.

Rosenzweig, A. (2017). How Pigouvian Taxes Work on Sellers, and Why We Should Care. Jotwell: J. Things We Like, 74.

Rowell, D., & Gyrd?Hansen, D. (2014). Could a Pigouvian subsidy mitigate poker machine externalities, in Australia?. Economic Papers: A journal of applied economics and policy, 33(4), 327-338.

South Australian Council of Social Service, (2016) .Losing the jackpot: South Australia’s gambling taxes. Retrieved from https://www.sacoss.org.au/sites/default/files/public/documents/Reports/Losing%20the%20Jackpot.pdf

Wu, S. T., & Chen, Y. S. (2015). The social, economic, and environmental impacts of casino gambling on the residents of Macau and Singapore. Tourism Management, 48, 285-298.

Buchanan, J. S. C., & Elliott, G. (2017). Moderate Risk and Problem Slot Machine Gamblers: A Typology of Gambling-Related Cognitions. Journal of Gambling Issues, (35).

Walker, D. M., & Sobel, R. S. (2016). Social and Economic Impacts of Gambling. Current Addiction Reports, 3(3), 293-298.

Churchill, S. A., & Farrell, L. (2017). The impact of gambling on depression: New evidence from England and Scotland. Economic Modelling.