Gambling, the
state and the
market
THE ROOTS OF MODERN
‘SOCIAL COST OF GAMBLING’
E S T I M AT E S
ecaf_2046 38..42
Douglas M. Walker and Shannon M. Kelly
We discuss some critical issues in social cost of gambling methodologies which
suggest that many social cost estimates are arbitrary. Rather than using monetary
estimates of costs and benefits, we argue policy-makers should focus on
fundamental issues: consumer sovereignty, property rights and the role of
government in free societies.
Keywords: Social costs of gambling, problem gambling, cost–benefit analysis,
consumer sovereignty, property rights.
Introduction
The casino industry continues to grow
around the world, despite the recent
economic downturn. In fact, many
jurisdictions moved to legalise casinos
precisely because of slowing economies. The
primary reason casino gambling appeals to
policy-makers, regardless of nationality, is
that casinos are generally believed to
contribute to tax revenues, provide new
employment opportunities and generally
contribute to economic growth.
In the academic literature it seems fairly
well-accepted that casinos can contribute to
economic growth, at least in the short term,
and can help stimulate employment and
average wages. Although the economic
impacts of casinos are certainly sensitive to
local economic conditions, it is reasonably
clear that casinos act like other industries in
their positive role in economic development.
At the same time, policy-makers must
consider the potential cost side of the ledger.
Casinos may be associated with some ‘social
costs’ which may be attributable specifically to
casinos, to gambling in general or to the
behaviour of ‘problem gamblers’. Such costs
are generally important considerations to
policy-makers when determining the extent to
which casinos should be legal. The academic
literature on the social costs of gambling,
however, is much less ‘conclusive’ than it may
appear based on political discussions on the
economic effects of casinos. Indeed, there are
some fundamental measurement problems
that we believe make social cost estimates
more or less arbitrary.
Background
The social costs of gambling became an
important academic debate in the USA in the
early 1990s, as did ‘the economics of
gambling’, which coincided with the spread of
casinos in the US outside of Nevada and
Atlantic City, NJ. A 1994 book by Robert
Goodman, Legalized Gambling as a Strategy for
Economic Development, as well as a 1994
congressional hearing on the topic, shed light
on this issue of costs associated with casinos
and ‘problem gambling’ behaviour.1 In
Goodman’s book and in the congressional
testimony, researchers began reporting
estimates as to the monetary cost on society
from problem gambling behaviour. Goodman
(1994, p. 63) reports that social costs are
roughly $13,200 per pathological gambler
each year.
Other social cost estimates from studies
released between 1994 and 2004 ranged from
$9,500 to over $53,000 per problem gambler
per year.2 Another participant in the
congressional hearing was economist Earl
Grinols. Grinols also testified as to the large
social costs of gambling. More importantly
and recently, however, Grinols has
contributed to the debate with his 2004 book,
Gambling in America: Costs and Benefits, in
which he seems to offer a definitive social cost
estimate of $10,330 (Grinols, 2004, p. 171).3
His estimate is the average from other studies.
© 2011 The Authors. Economic Affairs © 2011 Institute of Economic Affairs. Published by Blackwell Publishing, Oxford
iea e c o n o m i c
The types of social costs identified in studies vary, but
typically include the following categories: employment costs,
including lost work hours, unemployment compensation and
lost productivity; bad debts; civil court costs; criminal justice
costs, including the value of thefts and costs associated with
arrests, trials, probation and incarceration; therapy for
problem gamblers; and social welfare expenditures.4
The validity of social cost of gambling estimates has been
long debated in the literature and at academic conferences.
Two international academic conferences (in Canada in 2000
and 2006) have been dedicated solely to the social cost issue.
It is safe to say that neither conference succeeded in producing
agreement among researchers. Today there is still as much
disagreement as ever on to how to properly define and
estimate the social costs of gambling. This disagreement arises
despite a variety of papers, books and conferences that have
addressed the issue.
It seems that the social cost of gambling literature has been
built on a shaky foundation. This might explain the enormous
range of monetary estimates as well as the long list of social
cost categories that can be found in most literature on the
subject. One reason for this is that researchers examining the
issue come from a variety of disciplines. The most appropriate
approach seems to us to be a mainstream welfare economics
perspective.
a f f a i r s m a r c h 2 0 11
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not ‘social’ costs. Pecuniary externalities, wealth transfers and
‘private costs’ are not reductions in societal wealth.
‘Abused dollars’
In one of the first published papers on the social costs of
gambling, Politzer et al. (1985) introduced the term ‘abused
dollars’ as a social cost category.5 Recently this category of
‘cost’ has resurfaced in social cost of gambling estimates. Most
notably, Grinols (2004, pp. 172–173) includes abused dollars in
deriving his social cost estimate of $10,330 per problem
gambler per year.6 As a result, other studies also use this cost
category. For example, a 2010 report by the New Hampshire
Gaming Study Commission uses ‘abused dollars’ and cites
Grinols (2004).7
But what, exactly, does ‘abused dollars’ mean? Grinols (p.
145) explains that it is the ‘term applied to lost gambling
money acquired from family, employers, or friends under false
pretences’. His examples include money stolen or money
‘loaned under duress’ that is never repaid. The New
Hampshire report explains: ‘These costs are those associated
with money lost gambling that was taken from family, friends,
or employers that is never reported as a crime’ (p. 48). Under
both conceptions, ‘abused dollars’ are just transfers. But let’s
take a closer look at Politzer et al.’s (1985, p. 133) original
definition of ‘abused dollars’:
The roots of social cost estimates
Often the political debate over the costs and benefits of
gambling is quite removed from the academic debate.
Politicians tend to rely on monetary estimates of costs and
benefits because such data can be easily used to support their
positions. Unfortunately, social cost estimates usually give a
false sense of precision. As we will show below, many social
cost estimates are based on fairly arbitrary assumptions or
very general definitions of ‘cost’. As a result, we believe most
social cost estimates published to date wildly overestimate the
social costs of gambling.
Researchers have not come to an agreement on how to
categorise or measure social costs. Walker and Barnett (1999)
define ‘social cost’ as a reduction in societal real wealth.
Whether their definition is adopted or not, they discuss in
detail the problems that result from a failure by researchers to
properly define ‘social cost’ prior to attempting to put a
monetary value on it.
Wealth transfers
One major problem in the literature is that wealth transfers
are routinely considered to be ‘social costs’. Most studies
include transfers such as unemployment compensation, bad
debts and bailouts in their social cost estimates. Other
researchers have argued that wealth transfers should not be
included in cost–benefit analysis because they do not reduce
societal wealth (Walker and Barnett, 1999). Just as when a
parent loans money to a child and doesn’t receive repayment
in the future, ‘bad debts’ and ‘bailouts’ should be considered
in an equivalent manner and therefore should not be viewed
as social costs. Although such things may be unfortunate
effects of problem gambling behaviours, they are ‘private’ and
‘The estimate of the average annual amount obtained legally and/or
illegally by the pathological gambler which otherwise would have been
used by the pathological gambler, his family, or his victims for other
essential purposes. These abused dollars include earned income put at
risk in gambling, borrowed and/or illegally obtained dollars spent on
basic needs and/or provided to the family which otherwise would have
been “covered” by that fraction of earned income which was used for
gambling, and borrowed and/or illegally obtained dollars for the partial
payment of gambling related debts.’
This is perhaps the most obviously flawed component
included in social cost estimates.
First, the definition is so vague that any money gambled and
lost could be counted as ‘abused dollars’. So if a person decides
to bet $10,000 during a year, that amount could be considered
‘abused dollars,’ regardless of whether there is harm to the
person or to others. A definition so vague leaves researchers
free to interpret it how they want. Thus, Grinols is able to add
a significant amount to his social cost by citing ‘abused
dollars’.
Even if we can ignore the vagueness of the definition, how
is it that researchers are supposed to estimate the value of
abused dollars? Researchers typically try to survey individuals
with gambling problems, even though research has shown
such people to be nearly incapable of even estimating their
gambling losses accurately.8 Other questions arise, such as
what qualifies as a ‘basic need’? The abused dollars definition
can be interpreted to mean gambling provides no utility and
any other expenditure is a higher priority – or a ‘more basic
need’ – than gambling. Admittedly, a concept such as ‘abused
dollars’ might be useful to psychologists attempting to identify
people who might have gambling problems, but for
researchers attempting to provide an objective estimate of the
© 2011 The Authors. Economic Affairs © 2011 Institute of Economic Affairs. Published by Blackwell Publishing, Oxford
40
the roots of modern ‘social cost of gambling’ estimates
social costs of gambling, the concept of abused dollars has
little or no value. For anti-gambling advocates, this type of
‘cost’ simply opens the door for making extremely high social
cost estimates.
Awareness of costs
An even more surprising (and influential) social cost
methodology can be found in the paper by Markandya and
Pearce (1989), which examines the social costs associated with
cigarette smoking. A number of recent studies9 credit their
method specifically to that paper. Although the method
overlaps with a welfare economics perspective, there is one
critical difference which we focus on here. In defining
social costs, Markandya and Pearce (1989, pp. 1139–1140)
write:
‘To the extent that the costs are knowingly and freely borne by the
consumer or producer himself, they are referred to as PRIVATE COSTS
but to the extent that they are not so borne but fall on the rest of
society, they are referred to as SOCIAL COSTS. Hence the total cost of
any activity is the sum of the private and social cost.
The simple distinction, however, is complicated by a number of
factors . . . , the most important of these is the extent to which the
consumer is aware of the costs that he bears. If his actions are
determined by a perceived cost that is in fact less than his actual cost,
then the difference between the two can be viewed as a social cost.’
The reasoning behind the ‘awareness’ factor is the same as
that in a standard externalities case like air pollution. The
idea is that the full cost of the activity (car production, for
example) is not taken into account by the actors. Had the full
costs been considered, including the pollution externality to
third parties, then the amount of production would have
been lower. The socially optimal level of production
represents that where the marginal cost equals the marginal
benefit. Markets ‘fail’ to yield this result when externalities
are present because, in the case of negative externalities,
some of the costs are ignored.
In the case of smoking then (and perhaps gambling), the
idea is that if the smoker is not aware of the full costs of
smoking – even if the costs fall on the smoker himself – then
Markandya and Pearce classify this as a social cost because
consumers are likely to choose to smoke too much, from a
social perspective. There are two problems with this. First,
their definition seems to assume that smokers consistently
underestimate the potential private costs of smoking (and
those who cite the Markandya and Pearce study for analysing
gambling likewise seem to be assuming that people
underestimate their potential private costs from gambling).
But there is no reason to make this assumption. Viscusi and
Hakes (2008) find that people tend to overestimate the lung
cancer risks and life expectancy losses from smoking. Logically
this suggests that from Markandya and Pearce’s perspective on
social cost there may be too little smoking from a social
perspective. This is not a possibility they considered; indeed it
seems absurd. But are benefits that accrue to an individual
that are ‘unknown’ to be counted as social benefits of the
action?
The second, more general, problem with Markandya and
Pearce’s definition of social cost is that it raises the possibility
that every action may entail enormous social costs (or
benefits). After all, how often do consumers have full knowledge
about the costs and benefits of any action? It is unlikely that
car drivers have full knowledge about the costs of driving,
including the risks of being in an accident, of dying or of
having a car break down during rush hour. In short, everyday
decisions are full of uncertainty. It seems very odd to consider
these uncertainties to be ‘social costs’ when the costs actually
fall on the actors. In the context of estimating the social costs
of gambling, if this method is used, then any costs the person
did not predict ahead of time would presumably be social
costs that could be blamed on gambling.
It seems more straightforward – and more appropriate – to
simply count private costs as private costs, whether or not they
were anticipated or knowingly incurred. Otherwise more
complications arise.
Government expenditures
Another problem with social cost estimation is that
researchers often use government expenditures as indicators of
social cost. However, government expenditures are not
necessarily directly traceable to any one government policy.
The amount of money a government spends to treat
pathological gambling may be associated with policies related
to healthcare and other funded programmes such as
educational or public awareness campaigns. In considering
smoking and medical subsidies, Browning (1999) explains that
an inefficient allocation of resources is caused by the
government policy related to medical subsidies, not by
excessive smoking. Essentially, when government expenditures
are used to estimate social costs, the estimates can be further
inflated because of the creation of new government
programmes which attempt to combat the original problem.
For example, if the US government funded treatment for
problem gambling, then the ‘social costs’ of gambling would
increase significantly if we are using government expenditures
as an indicator of social costs.
While some government expenditures can represent social
costs, it need not be the case. This issue causes problems in a
wide variety of social cost studies. These problems cannot be
resolved without developing a more concrete definition of
‘social cost’ than those commonly used.
Summary
The social cost of gambling literature is still rather young. But
the ‘roots’ of this literature have some serious problems.
Researchers have failed to question and improve upon the
methods adopted by previous researchers, often resulting in
social cost estimates that are largely arbitrary. Should
gambling policy be based on such estimates of costs (and
benefits)? We believe there is too much concern for monetary
estimates of costs and benefits that may accrue from legalising
casinos. Policy should instead be based on more fundamental
considerations.
© 2011 The Authors. Economic Affairs © 2011 Institute of Economic Affairs. Published by Blackwell Publishing, Oxford
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Freedom of choice, property rights
and government
Often the government increases its authority at the expense of
the basic freedoms of consumers. Ironically, this is sometimes
done with a stated goal of helping consumers. In recent years,
especially in the USA, these increases in governmental
authority have become more pervasive.
One violation of basic consumer freedom exists when a
government prohibits a good or service from being produced
by the free market. The concept of consumer sovereignty refers
to the ultimate power of consumer choice; consumers
determine which goods will be produced by the market by
purchasing products that meet their demands. This
sovereignty, along with competition, leads to the best quality
and types of products being provided to consumers at the
lowest prices possible. A government’s decision to outlaw
casinos violates the principle of consumer sovereignty on
several levels. First, legal bans deny consumers free choice.
Secondly, although legal bans do not eliminate the markets for
the illegal products, they do artificially inflate prices. This
reduces consumers’ surplus. Thirdly, forcing the product or
service to be provided by the black market reduces consumers’
influence over prices, quantities and product quality.
In response, some people argue that government has a
responsibility to protect its citizens, for example, by declaring
certain drugs and activities illegal. However, staunch advocates
of consumer sovereignty would have the government
discontinue all bans, regulations and laws that label an activity
as ‘illegal’, as long as the activity does not harm others.
Although the argument can be made that the consumption of
certain goods and services can harm others, as in the cases of
second-hand smoke or drunk driving, in general, one’s
consumption by itself does not typically affect others.
The issues related to smoking provide an example of
consumer sovereignty despite the apparent social costs that
result from addiction. Each year, thousands of people die as a
result of nicotine addiction, but, as yet, governments have not
outlawed cigarettes. In the USA, 20.6% of the adult population
– about 46 million people – regularly smoke cigarettes, a result
of nicotine addiction (Center for Disease Control, 2009). In
the UK, estimates have recently reached a record low, but still
approximately 21% of the adult population smokes (Beckford,
2009). Smoking causes 467,000 premature deaths in the USA
each year (Goodarz et al., 2009), but there is no case where a
gambler was killed by a casino.
The question then arises of whether the government is
responsible for protecting individuals from their own personal
destructive behaviour? When government attempts to
establish this type of protection it comes at the expense of
consumer freedom. For example, in the 1920s the US
government attempted to protect individuals from
alcohol-related destructive behaviours during Prohibition. The
government soon realised it could not be successful and
subsequently repealed Prohibition.
If the government aims to protect individuals from
themselves, then the legalisation of any activity could better
allow for regulation of the activities. Even if the ultimate goal
is to protect the citizens from the consequences of bad
personal choices, outlawing an activity may actually cause
a f f a i r s m a r c h 2 0 11
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more harm. During Prohibition the underground economy
provided alcohol to citizens. Neither the production process
nor the sale of the goods was regulated by the government;
and market participants had no legal recourse for shoddy or
poisonous products. As a result, there were many people
engaging in illegal activities in order to sell and purchase
alcohol (usually more potent than during legalisation), with no
guarantee that the product was effective or safe. Arguably, a
better aim of government would be to regulate the industry to
ensure some level of safety and legal enforcement.
Another critical issue to be considered relates to property
rights. Should property owners have the absolute right to
build what they wish on their land? Most people agree that
some level of zoning regulation is useful and is a worthwhile
(limited) sacrifice of property rights. Zoning laws can improve
development patterns and economic growth. As long as
property is located within a commercially zoned district, why
should government restrict what type of business may be
created? If a property owner wants to establish a casino in
order to meet local market demand, why should government
step in? In reality, of course, anywhere casinos are legal,
almost every aspect of them is commonly regulated: the size,
types of games offered, building style etc. Few other industries
face such strict restrictions. Why are casinos so unique in this
regard?
Conclusion
We have examined problems with social cost of gambling
studies that have not received much attention in the literature.
These are but particular examples of some pervasive
methodological problems that undermine the validity of social
cost estimates and casino policy based upon them. Rather
than focusing on arbitrary and artificially precise estimates of
‘social costs’ and benefits of legalised gambling, policy-makers
would be better advised to consider more fundamental issues
related to freedom: consumer sovereignty, property rights and
the role of government in a free society. A result of this would
be the treatment of the casino and other gambling industries
as any other service sector industry. Some people may gamble
too much. But the risk of harming oneself is one of the
necessary consequences of living in a free society. Once a
government limits freedom, there is no guarantee that other
freedoms are safe from the same fate.
Acknowledgements
The authors acknowledge financial support for this project
from the Initiative for Public Choice and Market Process, at
the College of Charleston.
1. By ‘problem gambling’ we mean gambling to an extent which causes the
person financial problems, or problems in their personal life, career, family or
with friends. The terminology has changed over the years and it varies
according to the severity of the problem. We ignore these details and simply
refer to the behaviour that generates social costs associated with gambling
as ‘problem gambling’.
2. See Walker and Barnett (1999, Table 2, pp. 197–198) for examples.
Hereafter the estimates we refer to are per problem gambler per year.
3. Grinols specifies that this estimate is for pathological gamblers; others with
less severe conditions would cause lower social costs.
4. This list comes from Thompson et al. (1997, p. 87).
© 2011 The Authors. Economic Affairs © 2011 Institute of Economic Affairs. Published by Blackwell Publishing, Oxford
42
the roots of modern ‘social cost of gambling’ estimates
5. Of course, we could substitute pounds, euros or any other currency for
‘dollars’ without changing the meaning.
6. Grinols actually cites the 1981 conference paper version of the 1985
published study.
7. New Hampshire Gaming Study Commission, Final Report of Findings, 18 May
2010. Available at http://www.nh.gov/gsc/documents/20100520.pdf.
8. See Blaszczynski et al. (2006).
9. These studies include the Australian Productivity Commission (1999), Collins
and Lapsley (2003), Single (2003) and Single et al. (2003).
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Douglas M. Walker is an associate professor of economics, and
Shannon M. Kelly is an economics student, both at the College of
Charleston, in Charleston, SC, USA. Walker has served as a consultant
for governments, industry groups and in legal cases related to the
social costs of gambling. None of these consulting activities is
associated with the specific focus of this paper ([email protected] and
[email protected].).
© 2011 The Authors. Economic Affairs © 2011 Institute of Economic Affairs. Published by Blackwell Publishing, Oxford