Introduction

Gambling has become an important source of government revenue all around the globe at the local, regional and national levels. Governments seek to maintain, and where possible to increase, the inflow of gambling revenues. Gambling businesses operate with a profit maximisation objective and find increasing government taxation a serious threat to profitability. One way to approach the problem between firms and tax authorities is to first analyse how to increase the size of the aggregate pie to be divided between the two. The key variable of analysis is the aggregate house take-out percentage, since this is the essential element of the price of gambling from the perspective of potential consumers. Our analysis focuses on the question of how to set this take-out percentage so that the aggregate revenue collected from gamblers is maximised. However, the analysis presented in this chapter is useful for other policy purposes because it quantifies the demand curve.

Reduced consumption, in addition to the amount of revenue raised, is also of interest to certain government entities, particularly those concerned with social issues such as problem gambling, crime and other social ills that are sometimes seen to be negative externalities of legal gambling markets. For these other purposes, it is also worthwhile to have an estimate of the responsiveness of gambling demand to increases in the house take-out rate.