South Australia places 15% tax on gambling

Australia is unusual among developed countries, it does not tax gamblers. This is unusual for two reasons, firstly gambling is a demerit good, and secondly Australians gamble a lot and it is unusual for a government not to take advantage of taxing a popular activity.

Statistically Australians are the worst gamblers in the world. The chart below shows this.

The problem with gambling is that it represents a market failure because gambling is a demerit good and an imperfect information good.

Gambling is a demerit good because:

The actions of the gambler affect third parties, such as their families. This is a negative externality of consumption.

The result of gambling can place costs on others to help gamblers rehabilitate.

Therefore there are negative external costs associated with gambling.

Gambling is an imperfect information good because gamblers rarely understand the full effects of their actions on themselves. They gamble because they hope to win  in a system where the odds are designed to ensure overall gamblers loose. While short term gains are possible over time gamblers loose in aggregate.

The market situation is shown in the diagram below.

The idea of taxing gambling is therefore a good one. Taxes will move a market towards the social optimum (MSB = MSC at Qopt in the diagram.)

The real question is, will the South Australian tax work to solve the market failure? Will those who gamble realize that the price of betting has risen? Is the demand for gambling going to prove so inelastic that there is little change in behaviour (it is an addiction). Also will taxing the firms in this way simply lower profits of bookmakers rather than affect individual behaviour.

The ABC cover the story here