Thursday, 27 September 2012

All in! - Why Casinos Are Good For The Economy

What do Las Vegas, Atlantic City and Monte Carlo have in common? The answer is obvious – they all started as small settlements, growing into huge cities due to their success as gambling resorts. Hence on the first look, gambling seems like a powerful engine of the economy – but on the other hand, it also increases crime, causes addiction, and it really is just a transfer of money from gamblers to casino owners, not creating real productive value. So what is the truth? Schoolonomic believes that despite their social setbacks, casinos have several positive macroeconomic effects. Why? We will explain below.

Source: Destination360.com

A short story of gambling


Gambling has been around for as long as civilisation has been – the oldest discovered dices are 40,000 years old, while Greek soldiers entertained themselves with illegal dice games as a pastime. However, the opinion of policymakers, politicians and economists has been generally low of it, often banning it's practice. The situation started to change in the 18th century – and where else than the United States of America? George Washington reportedly financed the Revolutionary War partly by opening state lotteries – and since then, American and later, worldwide gambling has been unstoppable.

Opinion of economists


However, economists generally don't hold gambling in high regard – on the contrary, they condemn it as being unproductive in economic terms, and instead creating negative social costs, a.k.a. externalities. To quote the famous Paul Samuelson:

"(Gambling) involves simply sterile transfers of money or goods between individuals, creating no new money or goods. Although it creates no output, gambling does nevertheless absorb time and resources. When pursued beyond the limits of recreation, where the main purpose after all is to kill time, gambling subtracts from the national income."

How to 'save' gambling?


A pretty harsh opinion, huh? This mentality is one of the reasons why most governments either prohibit or strictly regulate gambling – not to mention increased crime rates, growing wealth differences, negative changes in working mentality and so on.
However, Schoolonomic disagrees. While we agree with all the effects and phenomena listed above, we think that gambling can still serve as an important motor for the growth of a region – remember the case of Las Vegas? Below, we will list the conditions which can make casinos a viable economic investment for economies as a whole.

How to build a casino


However we may like casinos or not, the fact is that they do only serve as a location of money transfers. Hence in order to increase economic growth in a region, casinos should attract visitors from outside the region – and the less casinos compete with each other, the better it is for individual casinos and regions. In order to maximise the social utility of casinos, they should also co-operate, rather than compete with local businesses and firms – if a casino get' it's demand from outer sources, and supply from local sources, then it can serve as a motor for economic development in a region. Check out our list below for more detailed explanations.

1. Start small, but grow large
The smaller region you are trying to improve in terms of population, the bigger will be the positive effect. Las Vegas succeeded exactly because it was built in the middle of a desert, but a desert which was easily reachable from nearby California, where gambling is illegal. The same is the case with Monaco in France. While cities house larger populations – and hence a larger number of potential customers, they also disperse socio-economic benefits, while the negative externalities would also effect a greater number of people. Hence, greenfield casino projects are generally the best ones, macroeconomically speaking.
2.Be the only one around
In today's world, most casino activity is strongly regulated or even prohibited. Hence when a casino does manage to open somewhere, it usually faces little local competition, and often has a monopoly on gambling not only in the region, but often beyond it's borders as well. The goal hence is to provide that monopoly to gamblers from outside the region – any additional casinos in nearby locations can only decrease profitability for not just the original casinos, but all casino regions as a whole, according to the law of diminishing returns.
3.Co-operate!
As we mentioned, casinos only provide maximum utility when they stimulate local businesses and firms either by directing a percentage of gamblers to them, or using their resources for their supply needs. Atlantic City fails to thrive compared to Las Vegas, because 1) it's too big – being part of the state of New Jersey, and 2) it doesn't stimulate local businesses. Since the opening of Atlantic City's casinos, The number of local restaurants has decreased by 40% due to the fact that casinos drain local residents away.
4.Las Vegas Tax'em
In the United States, the state of Nevada has yearly revenues from gambling between 800,000,000 $ and 1,000,000,000 $. And folks, that is a lot of money. Taxation is the most straightforward economic benefit of casinos, and in many places they make up a sizable proportion of public finance sources.

Conclusion


Gambling has both positive and negative sides – and why the externalities caused by it are considerable, we maintain our opinion that with careful planning, macroeconomic regions planning on increasing their gambling revenues can be successful in their planning, bringing positive effects to their society.
Do you agree? Or do you have a completely different opinion? Tell us in comments.



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