January 21, 2006
The Fundamentals of Casino Economics
Earlier this week, Marc asked why Rhode Island's casino proponents are taking such a convoluted route towards changing the state constitution to legalize gambling...
Instead of writing a clean, concise line or two saying something like, oh, I don't know...."gambling does not have to be state-operated", we have this:For an expert opinion on this matter, I refer you to Richard Posner, currently a judge on the Seventh Circuit Court of Appeals, a faculty member at the University of Chicago, and author of books with titles like Economic Analysis of Law and the Economics of Justice. Judge Posner recently posted to the Becker-Posner Blog (which he hosts along with Nobel Prize winning economist Gary Becker) on The Economics of Indian Casinos.
"Approval of this amendment to the state Constitution will authorize a casino gaming facility in the town of West Warwick, to be privately owned and operated in association with the Narragansett Indian Tribe, with tax proceeds from the casino being dedicated to property-tax relief for Rhode Island citizens, and will permit future privately owned and operated casino gaming facilities in this state only upon further vote of the people."
Where's the part that says only Del's Lemonade and Saugy's weiners can be served at the establishment?
Posner begins by describing the essential nature of a casino, arguing, in an economic sense, that there is no difference between a casino and any other entertainment business...
A casino is just a retail entertainment establishment, like a restaurant, bar, nightclub, supermarket, or game room. The investment involved in a casino is modest, consisting of little more than a building plus gambling tables, roulette wheels, and one-armed bandits.So if a casino is just a business, then why are casinos so much more profitable than movie theaters or restaurants? Or, to put the question in local context, why is it believed that a casino in West Warwick will have an economic impact on the entire state of Rhode Island that a multiplex movie theatre will not? Posner answers...
The answer is that gambling is a regulated industry. More particularly, entry is limited by government. This is not just a matter of requiring a license available to anyone able to pay a modest fee and perhaps meet some minimum legal and financial qualifications. In many states entry requires as a practical matter the entrant to prove that it is a bona fide Indian tribe, or, if it is not Indian, to convince a state legislature to permit non-Indians to compete.The high-profitability of casinos is created by an artificially low casino "supply" created by strict government regulation.
The huge profits of gambling and the resulting temptations to corruption, both the quasi-corruption of large campaign contributions and the outright corruption of bribes, could be eliminated at a stroke by abolishing the limitations of entry into gambling. Then entry into the gambling business would proceed until the price of gambling fell to the cost of operating a gambling business.
So this is my question to Rhode Island's gambling proponents. Government, we agree (at least in public) should not be in the business of protecting artificially high profits of non-essential business sectors. You cannot get any more non-essential than a casino. What, then, is the justification for government being so intimately intertwined with the casino business and carving out monopolies for a group of preferred casino operators and a particular town? If there really is strong public support to bring gambling to Rhode Island, then why not just legalize gambling in general?