The Economics of Lottery


Lottery is a gambling game or method of raising money in which a large number of tickets are sold and a drawing is held for prizes. Usually the number of prizes and their total value are predetermined. Profits for the promoter and the cost of promotion are deducted from the prize pool before the drawing is conducted. In the United States, most state governments offer a lottery.

Historically, colonial America relied on lotteries to fund many public works projects, including roads, canals, bridges, colleges, and churches. Benjamin Franklin organized several lotteries to raise funds for cannons to defend Philadelphia, and George Washington managed the Mountain Road Lottery in 1768 to finance his planned expedition against the French Canadians. Many of the prizes advertised in these early lotteries included land and slaves.

In the immediate post-World War II period, it was widely believed that lotteries could enable government to expand an array of social safety net programs without imposing particularly onerous taxes on the middle and working classes. This arrangement, however, began to erode in the 1960s as inflation and other costs increased.

A key question is whether the entertainment value of playing a lottery exceeds the expected disutility of losing money, making the purchase of a ticket an irrational decision for an individual. If so, the irrationality of loss is offset by gains in other categories, such as utility from leisure activities and social interactions. This is a crucial aspect of the economics of lotteries that should be considered by policy makers.