Sunday, March 14, 2010

Cox: Raise lottery ticket price to boost school funding

The Atlanta Journal-Constitution "Cox: Raise lottery ticket price to boost school funding" (March 12th, 2010) reports on the question of pricing lottery tickets without delineating any of the economics at hand.
Cox floated the idea on Thursday during a state Board of Education meeting, saying a 50-cent surcharge per ticket could bring in $350 million a year and help address Georgia’s massive education funding gap.
The article continues,
And the move could backfire if enough players balk at paying higher ticket prices, said David Gale, executive director of the North American Association of State and Provincial Lotteries.
This comes close to naming the way to determine whether or not the State should raise lottery ticket prices. Assuming the state is describing a tax increase rather than an increase in ticket prices that is passed through to higher lottery prize, as it seems it is, then the optimal price increase is determined by the elasticity of demand for lottery tickets. The government has a monopoly on lottery ticket sales in Georgia, and seeks to simultaneously maximize its profits from lottery ticket sales and provide a small amount of the wealth re-distribution as a public good. In principle, the state always knows this and was pricing optimally. Justification for a 50% increase in price requires some serious doubts in the government's ability to price optimally to begin with.

The question is not whether or not enough payers will "balk" at a price increase, but rather, whether or not the people who are almost indifferent between buying a lottery ticket and not doing so will decide not to when faced with a higher price. Raising the price by a full 50% will certainly deter some of these consumers. Without providing any evidence on the sensitivity of demand to price, the state runs the risk of losing a great deal of wealth by increasing ticket prices so severely.

No comments:

Post a Comment