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September 21, 2017 

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LOSS MINIMIZATION RULE: A rule stating that firm minimizes economic loss by producing output in the short run that equates marginal revenue and marginal cost if price is less than average total cost but greater than average variable cost. In the short run, a firm incurs total fixed cost whether or not it produces any output. As such, if the market price is falls below average total cost, it must decide if the economic loss from producing the quantity of output that equates marginal revenue and marginal cost is more or less than the economic loss incurred with shutting down production in the short run (which is equal to total fixed cost).

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Gambling On A State LOTTERY

You might recall during our discussion of gambling in the entry appropriately titled gambling, that I purchased $5 worth of Super Luck-O Multi-State Lottery tickets at the Master's Sprocket convenience store. Well, the day of the big drawing came and went. I was about as close to winning as the planet Pluto is to buying a Hot Mamma Fudge Bananarama Ice Cream Sundae on a cold winter morning. At least the five dollars I paid for lottery tickets goes to a good cause. The state uses a share of the proceeds for education, and that keeps my taxes lower. If you'll excuse me for a moment, I've got another ten bucks in my pocket screaming for the chance to by some more Super Luck-O Multi-State Lottery tickets. While I'm doing that, why don't you see if this is a wise consumption move on my part.

Taking A Gamble

Well over three-fourths of our 50 states in the good old U. S. of A. have entered the gambling business big time. In the not too distant past, the only state with anything to do (officially) with gambling was Nevada. But, Nevada didn't sponsor gambling or run the games, it only let them happen (and taxed them, of course). Somewhere along the line, other states decided that state-run lotteries were a good way to suck some extra dollars into their treasuries.

Here's how most state lotteries work:

  • Every so often, weekly in most cases, the state randomly selects four to six numbers, usually from some air-powered ping pong ball machine. A common range of numbers is from 0 to 99. Over the course of the preceding week, hardworking, taxpaying consumers are given the opportunity to guess which of those numbers will pop up. You plop down a few bucks for each guess and clutch the potential prize winning tickets until the numbers are announced. In most cases you win something if you get some, but not all, of the numbers correctly. For example, four of six correct numbers might net you a few hundred well-deserved dollars. If you get them all correct, then you win (or share) the big prize. Would $10 million help you forget that your boss thinks you're a jerk?

  • The purpose of state lotteries, is not to make people rich, but to give the state extra cash. With that in mind, it should be pretty obvious that the money accrued from lottery ticket sales don't just go for prizes. As far as gambling goes, state lotteries have the worst payout of any. Casino games, horse racing, and slot machines return a significantly larger share of total amount wagered the winners. Over half of the lottery ticket money is kept by states and used for whatever purposes the states have deemed worthy of tax dollars. Education is often held up as the recipient these dollars -- "Play the lottery, teach a child."

  • Some states also have "instant win" games, in which the lottery ticket tells you immediately if you've won the big prize. In this case, you scratch some shiny, silvery paint from your ticket to reveal if you'll remain a hardworking, taxpaying consumer or order a new Lamborghini and let the world know that your has obnoxious bad breath.
A New Direction for State Governments?

The answer to this question in this title is clearly yes. Most states have lotteries, and the rest are closing fast. It seems like such a natural. The state collects some tax money without actually taxing its citizens. Is this a great country, or what? Few people, if any, like to pay taxes, but a lot like to gamble. With a lottery, the state provides a bit of gambling entertainment, it collects some "taxes" in the process, and some valuable government services like education are made possible. Is this a great country, or what? There's also not much overhead expense in a lottery. Print up some tickets, buy an air-powered ping pong ball machine from a bankrupt bingo parlor, then collect the bucks. Is this a great country, or what?

All is not good with state lotteries. A few of the lottery critics favorite criticisms are worth a mention:

  • A regressive tax. In our little discussion of taxes we note that a regressive tax is one in which the poor pay a larger share of their income than do the wealthy. A big concern with lotteries is that the poor do most of the gambling and use income that would be better spent on food, shelter, and the like. The numbers from lotteries that have been running for awhile, however, suggest that rich, poor, and middle-class alike participate. There doesn't seem to be any undue burden on the poor.

  • A snowball's chance in hell. Another criticisms is that lottery ticket buyers fail to understand the extremely low chance of winning. For example, there are about a trillion combinations of six numbers that range from 0 to 99. If you bought one lottery ticket, you would have a one in a trillion chance of selecting the correct number. If you bought a million tickets, each with a different combination, you're still left with a one in a million chance that one of those numbers is correct. But people do win, and every time someone does, it makes the odds look better than they really are.

  • Win now, collect later. An underpromoted feature of state lotteries is their payout method. If you win the big $10 million prize in the Super Luck-O Multi-State Lottery, you don't actually win $10 million. What you win is something like $500,000 a year for 20 years. But, $500,000 this year isn't the same as $500,000 twenty years from now. For example, if you had $188,000 that you stuck in a bank account earning five percent interest, you would end up with $500,000 in twenty years. This means $500,000 paid twenty years from now is worth the same as $188,000 paid today. It also means that the state can collect $10 million in lottery ticket sales, stick a small portion in a bank at five percent interest for future payouts, then spend the rest. If the states weren't in charge of these lotteries, then they would probably throw the operators in jail for false and misleading advertising.

  • Morally decadent. There's also the criticism that gambling is morally wrong and not the sort of thing a government should be doing. In that morals, like tastes, are a very individual thing, there's no clear-cut conclusion. There are a few points to consider. Lotteries are voluntary -- you don't have to participate. If you quench your gambling thirst with a state lottery, then you're less inclined to slip into the more morally decadent underworld to pursue a wager. Then again, governments are known for screwing things up. There's no reason to think that state lotteries will remain free from the sorts of political shenanigans that infiltrate other government stuff. It's only a matter of time before the relative of some state governor hits the jackpot.

So where do we go from here? Are state lotteries an eternal fact of life? Are they a passing fancy that will be replaced by another ingenious method of taxing the public? Should they be encouraged, discouraged, or ignored?


Tips on Your State Lottery

  • The winning numbers for the Super Luck-O Multi-State Lottery drawing on Saturday are. . . No, come to think of it, I'll keep those numbers to myself.

  • If your state has a lottery, treat it as entertainment. Enjoy the thrill that goes with the uncertainty, but don't put the jackpot down as earnings on a home mortgage application until the money's in your bank account. Many play, but few win.

  • Don't, and I mean doubly don't, let your state replace other sources of revenue with lottery proceeds. History tells us that a state gets big bucks when it first sets up a lottery. Most of those bucks dwindle away, however, after the novelty wears off. At best, a lottery is an uncertain source of state revenue. (Ironic isn't it that lottery proceeds would be uncertain?)

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