The Social Costs of Gambling: An Economic Perspective

Much of the opposition to legalized gambling is based on analyses of the social costs that occur as a result of pathological gambling. It is our contention that many, if not most, authors who have contributed to this literature are either unclear or misguided in what they define as social costs. Instead of starting with a clear definition of what constitutes a social cost, these authors have adopted an ad hoc approach-using "common sense" to determine what constitutes losses to society and then attempting to quantify the impact of those activities. We believe this is not, as some suggest, simply a matter of semantics. Rather, it is a serious problem in the gambling literature. How do we differentiate between a consequence of pathological gambling that is a "social cost" and one that is not? Which of the consequences of addictive behaviors that are associated with gambling arise when gambling is legal, and which will be manifest in some form whether or not gambling is legal? In this article we explain the economic perspective on social costs. An understanding of this paradigm removes the subjectivity in the classification of pathological gambling's social costs. The paper has three major components. First, we introduce the economic notion of social costs. Using this paradigm, we differentiate between the "true" social costs related to pathological gambling, and other negative consequences that cannot legitimately be classified as social costs. Second, we evaluate a recent social cost study using the economics social cost paradigm. Third, we discuss two types of social costs that have been largely overlooked in the gambling literature. One is caused by gambling prohibition. The other occurs as a result of "rent seeking" that is related to the political process surrounding the legalization of gambling.