Response to review essay: ‘Equity and efficiency of state lotteries’

Economics

Pergamon

of Educorion

Vol. 13. No. 4. pp. 365-366. lYY4 Copyright @ 1004 Elsevier Science Lrd Printed in Great Britain. All rights reserved 0272-7757/Y4 $950 + 0.00 Review.

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Response to Review Essay: ‘Equity and Effkiency of State Lotteries’ PAUL

M. MASON

Departmentof Economics, Universityof North Florida,Jacksonville, FL 32224,U.S.A.

LIKE to thank Cooper and Cohn (1994) for the in-depth review that they provided to the readers of Economicsof Education Review. There are just a few commentsthat I would like to make regarding the reviewers’ remarks relative to the efficiency section of the book. The reviewers doubted our assumptionthat the price elasticity of demandfor lotto tickets is likely to be greater than synonymous elasticities for other sumptuary goods (e.g., cigarettes, alcohol, etc.). I agreethat our conclusionswould have beenstronger with a formal analysis of this issue. In a recently completed paper (Mason, Steagall and Fabritius, 1993,currently in the review process)we have done just that, estimating not only the demandelasticity for Florida lotto, but also the relative consumer surplus and excessburdens associatedwith lotto. Our estimates imply that the Florida lotto price elasticity of demandis centeredat 1.06, which is well above Whalley’s 1984 estimates for tobacco and alcohol. In the time since our book was written, I also discovered estimatesby DeBoer (1986) and Gulley and Scott (1993) that suggestedelasticitiesin excessof unity. Consequently, although our argument in this regard may not have beenaspersuasive asthe reviewerswould like, we did appearto imply the correct outcome. However, it is important to note that this new paper pointed to sizable net excess burden as well, making the lotto more offensive than we implied in the book. The reviewers’ objection to our 1988 paper regarding the diversion of revenue does not go far enough to understand our point. While it is clear that the administrative costs of lotto are not I WOULD

particularly different from those of other taxes, when a lotto ticket wins, the outcome frequently goesbeyond the administrative costs. Hundreds of thousands,if not millionsof people buy lotto tickets each week, but there are rarely more than a handful of big winners. While the dollars spent on lotto tickets constitute minor consumptionexpenditures, the winners save a major portion of what they win (both by their choice and becausethey are forced to by the annuity design). Therefore, the prizes do represent diversionsof revenues,particularly if the winnersare from out of state, or the annuity is held in an out-of-state investment. Combining slighly larger administrative costs with this effect is what leadsto the strong conclusionregardinginefficiency. The reviewersalsoobject to our assessment of the demandfor instant tickets. While it is not normalfor a demandcurve to be horizontal, it is not without precedent(e.g., demandfacing a purely competitive firm). While I do not object to the notion that individual demand curves for instant ticket buyers are downward sloping, the only relevant range for the market demand are the points along the purchaseprice - normally $1. This is due to the constant nature of the expected value of an instant ticket. Unlike lotto where the expected value changeswith the sizeof the pot, the expected return on instant tickets is alwaysthe same.Likewise, the revenue that accruesto the state is always half of what is spent by the buyers, and so the excess burden is all of the difference. I did go overboard by implying that the excessburden is infinite, but it increasesincrementally by the full difference for each additional ticket purchased.

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better levels than before the lottery. Most citizens do not realize that lottery revenues are a very small portion of education funding, despite all of the commentary to that effect. Lotteries do not necessarily cause the shift in funding away from the lottery beneficiary, but they make it much easier politically to achieve this misguided goal. Let me conclude by thanking the reviewers for their comments, and by expressing the hope that you will read the book, and draw your own conclusions.

One final point concerns the reviewers’ objections to our conclusions regarding lotto revenue fungibility. While it is likely to be true that state governments change their attitudes regarding priorities in the state budget, and this may explain the diversion of funding away from education in some of the education-supporting lottery states, our primary point was that the existence of the lottery made this diversion considerably easier to do. Because of the existence of lotteries, the public is deceived into believing that education is funded at

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F.A. (1993) The Demand for Wagering on State-Operated Lotto Games. I), 13-22. J. (1984) Numerical Specification of Applied General Equilibrium Models: and Data, in Applied Genera/ Equilibrium Analysis. (New York: Cambridge

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MANSUR, A. and WHALLEY. Estimation. Calibration, University Press, 1984). MASON, P.M., S~EAGALL, J.W. Tickets and the Corresponding

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