Social Costs of Gambling - Overview by A/Professor Michael O'Neil

By Associate Professor Michael O'Neil, Executive Director, SA Centre for Economic Studies

The question posed to economists was the following:

“Do the social costs of gambling exceed the benefits (including consumer surplus from recreational gambling and tax revenue for government)”

The results were that (N=28) 9 respondents agreed, 9 disagreed and 10 were uncertain.  A number of respondents commented that the question was poorly posed which I think reflects the debate as to what are and how to measure social costs (i.e. private and public costs) of gambling. The comments  also highlight the fact that this is a new and evolving field of research and that much of the current research is interdisciplinary in nature.  As a consequence ‘definitions of social cost’ are many and varied drawn from, inter alia, Cost of Illness (COI), public health and economist’s perspectives. The economists approach is not universally accepted or adopted by many researchers.

The Productivity Commission was one of the first research groups to attempt to define and measure the social costs of gambling. Using an economist’s framework they stated the following:

Private benefits and costs are those impacts of an activity which:

• are borne by those who were party to a decision to undertake the activity (called ‘internal’ impacts); and
• were rationally considered when they decided to undertake the activity.

Social benefits and costs are:

• the proportion of the ‘internal’ benefits and costs which an individual did not rationally take into account when deciding to undertake the activity; plus
• all ‘externalities’, which are those effects of an activity which are imposed involuntarily on others in society.

Note that, with respect to problem (addictive) gambling, the PC specified ‘the proportion of internal benefits and costs’ to differentiate between rational and non-rational behaviour, the later giving rise to the majority of social costs and hence the focus of policy interventions.  The  PC also considered difficulties in the measurement of social costs that arise due to their intangible nature i.e. emotional costs associated with problem gambling such as depression, suicide and relationship breakdowns. The PC stated their intangibility precludes precision or a point estimate and hence  provided a range for social benefits and social costs.

Legitimate social costs that are mostly agreed in the literature include:

• Legal costs of police, civil and criminal courts, incarceration as each divert resources;
• Problem gambling and gambling treatment costs (counselling, therapy, and support/training) and costs that seek to minimise problem gambling behaviours (e.g. advertising);
• Psychic costs (negative consequences/ impacts on family, colleagues, emotional impacts, loss of trust such as failure to pay debts, shame, victims psychic cost arising from theft, fraud, embezzlement) -  very difficult to quantify;
• Costs of industry lobbying (opportunity cost where talent, resources could be used more productively);
• Government incurs costs to collect bad debts, non-payment of taxes, fees, fines, etc.; and
• Costs of regulating the gambling industry (legislation, monitoring systems, etc.)

Not Included in Social Costs (from an economic perspective) are:

• Government transfers, welfare expenditure (tax A to pay B is a transfer, not wealth reduction);
• Bail out’ costs provided by family members that effectively redistribute wealth;
• Costs to the individual generally do not constitute social costs unless they create negative third party externalities (i.e. divorce, internal family issues, emotional costs, loss of trust); and
• Redistribution of wealth from the gambler to the provider is not of itself a social cost but it may create downstream costs to government (e.g. people lose their home, investments and then rely on public welfare).

There remains substantial problems in regard to the measurement of what might be called ‘obvious social costs’. For example, there is no doubt that cases of embezzlement, fraud and bankruptcy are associated with problem gambling behaviours, but are often not attributed as such before the  courts and recorded as such at the point of incarceration. Psychic and intangible costs are even more difficult to ascribe to gambling behaviours (e.g. issue of co-morbidity). However, the best informants on the private and public costs of gambling are those in counselling who report the loss of income,  wealth (their home, investments), impact on family, employment and productivity and personal well-being.

It is reasonably well documented that continuous forms of gambling and some gambling environments are more likely to give rise to high social costs through problem gambling behaviours. Perhaps this is why some respondents suggested that the question needed to be more tightly framed. There are clear  differences in aggregate turnover between gambling products, differences in expenditure patterns, net gaming revenue (losses) and taxation rates between say electronic gaming machines (EGMs), casinos, lotteries and wagering.  That is why the PC provided estimates of social cost for each forms  of gambling with the estimated social cost of EGM gambling between $1,369m and $4,250m (1997/98 dollars) whereas for wagering the range of costs was estimated at $267m to $830m.

Developments in technology (internet, mobile phone) offer opportunities to provide greater consumer protection and opportunities for more forms of continuous gambling.

The liberalisation of gambling has resulted in an explosion of opportunities to gamble and equivalently greater opportunities for irrational decision making with significant private (internal) costs that can only be addressed by external interventions (e.g. restrictions on availability, counselling).  It  does seem reasonable to treat these costs as social costs. Again, this is why the PC included some private (internal costs) of problem gambling as part of the measurement of social costs.

On balance, my judgement is that the benefits of a more liberalised gambling environment exceed the costs but that particular forms of continuous gambling are highly problematic and require constant vigilance. This is a relatively new field of research and does warrant greater attention from the community  of economists.

 

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