Public Goods and the Lottery

A lottery is a process for allocating something limited but in high demand, such as kindergarten admissions at a reputable school or units in a subsidized housing block. It may also dish out cash prizes to paying participants. In the latter case, lottery winners are selected by randomly drawing numbers or symbols to match those of other participating ticket holders. It is a form of game that has been popularized by state governments to raise money for everything from public works projects and educational programs to health and social welfare issues.

The idea of determining fates by casting lots has a long record, with a few references in the Bible and the first recorded use to distribute material wealth in Europe occurring in 1466. But the modern lottery is only about 150 years old, and its rapid expansion has raised concerns over its impact on society and the quality of public goods it supports.

Lottery profits have fueled an enormous increase in spending by state governments, and the states are now dependent on them for a significant portion of their revenues. The resulting reliance has resulted in some states developing a lottery culture with special constituencies: convenience store operators (whose customers are the main buyers of tickets); suppliers to the lottery (whose heavy contributions to state political campaigns are reported); teachers (in those states where the proceeds are earmarked for education); and legislators, who become accustomed to this painless form of taxation.

Because the state-run lottery is a business and is run to maximize its revenues, advertising necessarily focuses on persuading people to spend their money on it. It has been argued that this promotion of gambling leads to negative consequences for the poor, compulsive gamblers and other groups. But a more fundamental question is whether the state should be in the business of running lotteries at all.

In the United States, all lotteries are operated by state governments that have granted themselves exclusive rights to the activity. As a result, all lotteries are monopolies that do not compete with one another and use their profits to fund government operations. Currently, forty states and the District of Columbia have lotteries. As of August 2004, they had combined annual sales in excess of $20 billion.

In addition to the obvious revenue benefits, the state-run lotteries have a number of other advantages that make them an attractive form of public goods for many states. These include the speed and efficiency with which they can raise large amounts of money, the ease of establishing a lottery and the centralized control that is necessary to ensure integrity. In addition, the profit margins are very high, averaging 40% or more, and state governments can thus offer substantial prizes to players without sacrificing the viability of the lottery. Nevertheless, there are some limitations to state-run lotteries that need to be considered carefully. For example, if the jackpot is very large, there will be a greater likelihood that the winner will keep all of it.