Introduction
- State that government intervention is advocated in the market for casinos to:
(i) reduce the consumption of casino gambling
(ii) improve inequality in the distribution of income
- Identify and define the sources of market failure: Demerit good and imperfect information, Negative externalities from consumption and inequalities in the distribution of income.
Body
- Explain the sources of market failure in the market for casinos
- Demerit Good: Explain why governments view casino gambling as a demerit good.
- In the free market, there will be an over-consumption of casino gambling as consumers may be unaware of the negative externalities associated with its consumption for they have imperfect information about its long-term problems and damage to their own health, finances, and the stability and health of their own families. As such the government feels that consumers will over-consume since they do not accurately perceive how bad the consumption of casino gambling is, possibly due to imperfect information, resulting in allocative inefficiency.
- Identify and explain that in the case of casino gambling:
- Private benefit (MPB): refers to the enjoyment, the excitement experienced of betting against the odds in the hope of winning, a reward that an individual can give oneself as often and as long as one likes.
- Private cost (MPC): refers to the cost of casino gaming chips needed to play the various casino games available including slot machines and table games such as roulette and baccarat, transportation and accommodation costs. Medical costs to treat conditions related to physical health (eg.gastro-intestinal distress) as well as for psychiatric conditions (eg.preoccupation with casino gambling, feeling of loss of self-control).
- External Cost (MEC): refers to the cost imposed on third parties to play the various casino games available including family members and neighbours: the continued and increased frequency of casino gambling can cause hardship (emotional, physical, mental) to the casino gambler,family members and neighbours.
- Figure 1 illustrates the divergence between marginal private cost and marginal social cost.
- Equity concerns: Explain why governments consider inequality in the distribution of income socially undesirable.
- If left to the free market, the supernormal profits generated from casino operations are not widely distributed as corporate stock ownership is largely concentrated in the hands of the casino owners.
- Great inequalities in income distribution may lead to an unsatisfactory allocation of resources. Given that the free market responds to the “dollar votes” of consumers, resources may be allocated mainly to the production of goods and services demanded by only the rich. For example resources diverted towards the excess production of luxury items resulting in a lack in the production of basic necessities. Consequently basic necessities may not flow to those who need them the most.
- Synthesis
- Governments can employ a range of policies to reduce the consumption of casino gambling thereby achieving allocative efficiency, and improve inequality in the distribution of income, thereby achieving a more equitable allocation of resources.