South-Western College Publishing - Economics  
States Try to Trump Video Poker Machine Owners
Subject Elasticity of Demand
Topic Elasticity
Key Words Gambling, Addictiveness, Regulated, Tax
News Story

Louisiana and South Carolina have begun to control the amount of video poker gambling. Video poker machines are often found in gas stations, restaurants, and convenience stores. Critics argue that the machines are the crack cocaine of gambling owing to their convenience and addictiveness. They report that many have gambled away their paychecks, and that gamblers are often from poor families.

In Louisiana in 1996, 33 of the state's 64 parishes voted to ban the machines. This ban took effect on July 1, 1999. In South Carolina, voters will decide in November whether to allow video gambling to continue. If it does, it will be more closely regulated and heavily taxed. While the maximum jackpot will rise to $500 per sitting from $120 per day, minors can no longer play, machines are to be closed on Sundays, and no more than five machines are to be permitted in one establishment. The tax will be 25 percent, yielding an estimated $180 million per year for the state.

(Updated August 1, 1999)

Questions
South Carolina is proposing a number of changes to the video poker industry.  
1. a) The news story states that video gambling is addictive. What does this imply for the slope of the demand curve?
  b) Draw a diagram of the video poker market in South Carolina. The vertical axis should represent the total price of gambling including the wager, the cost of time spent gambling, travel costs and so on. The horizontal axis should represent the number of games played. Show the supply and demand curves and mark the equilibrium price and quantity of video poker games.
  c) The state is limiting the number of video poker machines under one roof. Assuming that this results in an overall reduction in the number of machines, show the effect on your diagram. What happens to the equilibrium price and quantity of video poker games?
  d) Why might the price change even though the wager per game might stay the same?
  e) Why might legislators be disappointed with the outcome?
2. a) The state is allowing bigger jackpots. Which curve would be affected and why?
  b) Draw another diagram of the video poker game market. Show the effect of the bigger jackpot on the equilibrium price and quantity of video poker games.
  c) Why are critics concerned? Refer to your diagram.
3. a) The state is planning a 25 percent tax on video poker games. Assuming the tax is levied on each game, which curve will be affected? Why?
  b) Draw a further diagram of the market for video poker games. Show the effect of the tax on the equilibrium price and quantity of video poker games.
  c) Shade in the area representing the tax paid to the state. Who pays the larger share? Why?
  d) Explain why the video poker machine owners suffer. Refer to your diagram.
Source David Firestone, "2 States Act to Limit Spread of Video Poker Machines," The New York Times, July 2, 1999.

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