The Puzzling Case of the Revenue-Maximizing Lottery

Familiarity with state lotteries obscures their strangest characteristic-that they are designed to extract as much revenue as possible from lottery consumers. States do not attempt to wring as much revenue as possible from the consumers of any other product, either through government monopolies or through revenue-maximizing taxation. In this article, Prof. Zelenak considers various possible justifications for the uniquely unfavorable treatment of lottery consumers. The article concludes that the special state treatment of lotteries cannot be justified by efficiency analysis, distributional effects, or historical precedent. The article notes, however, that the previous illegality of lotteries meant that lotteries could be introduced without depriving lottery players of any accustomed (legal) consumer surplus. This unusual circumstance is a legitimate factor in a utilitrarian analysis of the optimal implicit tax rate for a state lottery, but even it fails to justify revenue-maximizatio