The Evil of Privatization

Jacob Sullum | January 24, 2007

Illinois is planning to "privatize" its lottery, which it hopes will go for $10 billion or so. Opinion is divided as to whether this makes good fiscal sense; much depends on the future profitability of the lottery and whether the state could have made more money by hiring a private company to manage it rather than selling it outright. Morally, though, the sale is a disaster. It's bad enough when the government raises revenue by running a business that no one is allowed to compete with, especially the sort of business the government otherwise views as a vice to be discouraged or stamped out. (Liquor sales are another example.) It's worse when the government transfers this monopoly to a private company that will be even less accountable for how the business is run and the money is spent. The value of this "public asset" consists almost entirely of the ban on competition.

Comments

Sam Franklin|1.24.07 @ 11:39AM|#

Antitrust law to the rescue.

(Good thing we left those on the books -- they were bound to come in handy SOMEday.)

|1.24.07 @ 11:45AM|#

Antitrust law to the rescue.

You mean we can sue the State of Illinois for abusing its monopoly power of government?

Why didn't you tell me sooner!

stephen the goldberger|1.24.07 @ 11:45AM|#

i always thought of the lottery as an absolutely brilliant tax on stupidity.

|1.24.07 @ 11:45AM|#

Antitrust law to the rescue.

Or gambling could be legalized. Just a thought.

...Then again it would be nice to be able to use the anti-trust law one day.

Sam Franklin|1.24.07 @ 11:50AM|#

You mean we can sue the State of Illinois

Seems like fewer issues would be raised if the private beneficiary of Illinois law were sued instead.

If they want to pay me to brief sovereign immunity issues, too, then, fine, throw Illiois in there. It is not like I am one of those fancy $300/hour attys you read about. Illinois might be a neccessary party anyway.

Charlie|1.24.07 @ 11:50AM|#

Some enterprising entrepreneurs and their lawyers will open up gambling in Illinois. Expect a challenge to arrive in their state supreme court in the next couple of years.

thoreau|1.24.07 @ 11:54AM|#

This lottery would become far less valuable to its owners if Illinois simply relaxed its gambling laws and allowed any willing company to start a lottery and compete. I assume, however, that the sale of the lottery to a "private" firm (in fact a state-protected firm) would include some agreement that Illinois won't allow anybody else to enter the business.

What happens if Illinois tries to liberalize its gambling laws? Can the firm that buys the lottery sue the state?

Anyway, I think any reasonable libertarian would agree that the simplest solution would simply be to liberalize gambling laws rather than "privatizing" the lottery, protecting the owner, and then attempting to regulate the owner to make sure the monopoly status is only used in a state-approved manner (which is not necessarily the same as preventing abuse of monopoly status).

Christopher Monnier|1.24.07 @ 12:02PM|#

Hence the problem with "privitization." Radley Balko used a better term one time..."marketization." This is an example where the lottery is being "privatized" but not "marketized." Marketization is what libertarians are really after.

|1.24.07 @ 12:04PM|#

Note that what Illinois is doing here is, in fact, the original -- and actually economically harmful -- meaning of the word 'monopoly'.

The "monopolies" that antitrust law feigns to address are pikers in comparison to what Illinois is setting up here.

The Wine Commonsewer|1.24.07 @ 12:06PM|#

I've said this before but I deeply regret voting to give a monopoly on gaming in California to the Indians. Big Fargin' Mistake. My thinking was that this would be a foot in the door, a move toward outright legalization, etc. Could not have been bitten harder in the butt by the Law of Unintended Consequences. And they all still live in those ramshackle, falling-off-the-blocks, fifty year old double wides.

|1.24.07 @ 12:10PM|#

i always thought of the lottery as an absolutely brilliant tax on stupidity.

True, sort of. Think of it this way; the lottery is almost the inverse of the recently popular show "Deal or No Deal". In DoND, the player is always offered less than their expected return. A perfectly rational player would never accept the deal. The game is a measure of a players aversion to risk, which, for DoND, is almost directly related to their bank balance. To a not-so-wealthy player $20K in hand is more valuable than the prospect of $200K. The same goes for the lottery. The slim prospects of a big pay out are worth more than $1. And that first dollar is the best dollar spent, that is, it buys better odds than any successive dollar.

When the powerball gets ridiculous I can't help but pitch in my $1. For that dollar I'm buying odds nearly infinitely better than yours, assuming you don't play.

Sam Franklin|1.24.07 @ 12:16PM|#

The "monopolies" that antitrust law feigns to address are pikers in comparison to what Illinois is setting up here.

I dunno. I hear Steve Albini play poker on the Net for money. He is what? Evanston still?

The riverboats in Indiana are not that far away.

Even Vegas is doable for some in Illinois.

How are they on horsetrack betting? Bingo?

I mean, the antitrust violation is clear here, but let's not get carried away.

The Wine Commonsewer|1.24.07 @ 12:17PM|#

While I agree that this sort of privatization has a certain stench about it there is the one meager point that a private company is likely to manage the business better than a government agency.

That has been demonstrated over and over with public golf courses, in fact, Reason has a study on public golf courses that you can find on their sister site proving my point.

Given the political climate that is NEVER going to allow liberalized gaming, I think a more appropriate strategy might be contracting management services to a private firm or outsourcing rather than an outright sale.

OTOH, Reason often advocates the sale of public assets to private interests and, in fact, I believe Bob Poole (THE MAN) has written and spoken extensively about the long term toll road leases that the article talks about.

|1.24.07 @ 12:17PM|#

In DoND, the player is always offered less than their expected return.

I used to think that this was the case. But in my occasionally watchings, I did see them offer one contestant deals higher than the expected value. The idiot didn't take the deals, thus justifying the offers.

So I would say the winning strategy is to act like you won't take any deal -- that you will play until the last big value is gone -- and then take the first offering of any substance above expected value.

|1.24.07 @ 12:35PM|#

"The riverboats in Indiana are not that far away.

Even Vegas is doable for some in Illinois.

How are they on horsetrack betting? Bingo?"

just fyi,
illinois has riverboat casinos of its own (unless by "illinois" you mean "chicago"), as well as horsetrack gambling. getting to vegas from illinois does not take all that long - by plane.

in fact, last i heard the 5th most popular tourist destination in illinois was the riverboat casino in e.stl

nothing to add to the debate.

|1.24.07 @ 12:36PM|#

Wouldn't it funny if some company bought it for $10B, and the feds immediately arrested the new private owners for running "a colossal criminal enterprise masquerading as legitimate business"?

|1.24.07 @ 12:44PM|#

Wow, a government franchise just like in the olde days. "Please, Sir, may I operate a mine?" "Please, Sir, may I operate a steamboat company?"

thoreau|1.24.07 @ 12:47PM|#

TWC-

It's one thing to sell something to a private company. It's another thing to give this private company a legally-enforceable monpoly that the state will continually enforce.

As to Deal or No Deal, they start off offering less than the expected return (average of the values still in play), but as time goes the offer becomes closer and closer to the expected return, and eventually exceeds it. That's one reason why it's rational to keep playing: Even if you knock out some big numbers, they're going to adjust the formula in your favor, so if you don't knock out too many big numbers you'll be fine.

|1.24.07 @ 1:22PM|#

I only play the lotto when the jackpot is higher than the odds. I have no good reason for that.

thoreau - do you know that to be true about Deal or No Deal or just guessing from observation? just curious.

|1.24.07 @ 1:25PM|#

I hear Steve Albini play poker on the Net for money. He is what? Evanston still?

Dammit! They got Steve Albini? Oak Park has Ben Weasel.
You win this round, Evanston.

|1.24.07 @ 1:52PM|#

Hence the problem with "privitization." Radley Balko used a better term one time..."marketization." This is an example where the lottery is being "privatized" but not "marketized." Marketization is what libertarians are really after

Hmmm. Intriguing point.

RSDavis|1.24.07 @ 1:58PM|#

There's a certain value in the happiness of imagining myself with $300 million for a few days that is worth more to me than the dollar I spent on the ticket. (Well, the two or three times a decade I buy one, anyway.)

Simple as that.

- rick

Sam Franklin|1.24.07 @ 1:58PM|#

Marketization is what libertarians are really after

The best libertarians are not just after marketization, but competition. Although markets can lead to competition, they are neither a neccessary nor a sufficient condition, IMHO.

Larry A|1.24.07 @ 2:00PM|#

When the powerball gets ridiculous I can't help but pitch in my $1. For that dollar I'm buying odds nearly infinitely better than yours, assuming you don't play.

Actually your chances of winning the lottery are essentially the same whether you enter or not.

The Wine Commonsewer|1.24.07 @ 2:03PM|#

It's one thing to sell something to a private company. It's another thing to give this private company a legally-enforceable monpoly that the state will continually enforce.

Understood, but....when Reason's private toll lanes on the 91 Freeway were finally sold back to the state one of the big gripes about having the lanes in private hands was that the company had a monopoly.

I'm troubled that a private firm has a monopoly on lottery tickets. But I'm also having a hard time seeing the difference between a monopoly on the lottery and the monopoly on a stretch of highway, or a contract to provide fire services, or a monopoly to provide trash pick up.

Sam Franklin|1.24.07 @ 2:07PM|#

I'm troubled that a private firm has a monopoly on lottery tickets. But I'm also having a hard time seeing the difference between a monopoly on the lottery and the monopoly on a stretch of highway, or a contract to provide fire services, or a monopoly to provide trash pick up.

The difference is who votes for the "board of directors" of the business entity.

If it is public, then the "board of directors" are the elected officials in charge of the level of government that runs the business entity. "Everybody" votes in those election. One vote per person.

If it is private then the board of directors is elected by the people who own stock in the private entity. Not "everybody" votes in those elections. One vote per dollar.

wolske|1.24.07 @ 2:14PM|#

I can back up thoreau based on analysis -- I actually recorded the values in Excel for contestants over the course of almost a week (this was when the show was new and before the contestants started acting like complete morons -- I can't watch the show anymore). The offers from the banker were fairly consistent, starting from around 10% of expected value and increasing by about 10% per round. What was really interesting was if they knocked out a big number in the recent round, the % of EV would go down (or not increase by as much) -- playing on the expectation that the contestant would feel bitten and quit.
And a number of times I've seen them offer higher than EV; generally when it's in the bankers best interest to get rid of them for a known value; pay them $200K rather than risk the 1/4 chance that they win $750K. You're right, they still rarely take those offers...

The Wine Commonsewer|1.24.07 @ 2:30PM|#

The difference is who votes for the "board of directors" of the business entity....

Sam, I understand all that. I'm not seeing the difference between the private trash service that was granted a monopoly to pick up my trash every week and the private company that has a monopoly to provide lottery tickets.

Except, I can choose not to buy lottery tickets but I do need someone to pick up the trash.

The basic point I was making is that Reason, Cato, and many other libertarians support measures that move government provided services from the public sector to the private sector even when it's a monopoly contract.

IE, they would support a contract with a private trash company as a better alternative than county or city provided trash service.

I'm asking, what's the difference between that scenario and the monopolized lottery service?

Sure, we'd all like to see pot legalized but we'll take medical marijuana for now.

As an aside, I have noticed that local taxes have not gone down as services have been shifted to private providers. The net effect has been that we now pay extra for stuff that used to be provided by the government and paid for with property and sales taxes.

|1.24.07 @ 2:30PM|#

But I'm also having a hard time seeing the difference between a monopoly on the lottery and the monopoly on a stretch of highway, or a contract to provide fire services, or a monopoly to provide trash pick up.

The difference in my eyes is in the fact that competition with the state lottery is illegal. It is not outright illegal for me to hire someone besides the city's chosen vendor to pick up my trash, or to put out a fire, or -- if they can manage it -- to build a parallel tollway.

It is illegal for someone else to run a numbers racket, even though -- especially though! -- the state runs one that only pays out 50% of its take!

If Illinois really wants to privatize the lottery, they should simply privatize it and let anyone run a lottery. If they insist on stealing 50% of the revenue, then they should put a 50% tax on that industry's revenue. Done and done.

The Wine Commonsewer|1.24.07 @ 2:41PM|#

It is not outright illegal for me to hire someone besides the city's chosen vendor to pick up my trash

MikeP, actually in most places it is illegal and it certainly is on my street.

Rural Metro Fire Services is a private emergency services provider that has monopoly contracts with each city for fire, ambulance, and paramedic services. They are demonstratably better and cheaper than government provided comparable services. It's a monopoly. I can't see the difference between that and a monopoly provider of lottery tickets. Not saying the government should be doing that I'm saying that normally libertarians and conservatives approve of measures that shift government provided services to the private sector.

I think our vision of this transaction is colored by the fact that it's gambling.

|1.24.07 @ 2:50PM|#

Actually your chances of winning the lottery are essentially the same whether you enter or not.

I'm easily convinced; show me the guy that won, yet didn't own a ticket.

As to Deal or No Deal, they start off offering less than the expected return (average of the values still in play), but as time goes the offer becomes closer and closer to the expected return, and eventually exceeds it

I guess this is what I get for trusting Wikipedia too much; seems they've corrected the page since I was last there.

|1.24.07 @ 3:04PM|#

For that dollar I'm buying odds nearly infinitely better than yours, assuming you don't play.

When it comes to the lottery, you can't lose if you don't play.

|1.24.07 @ 3:16PM|#

I think our vision of this transaction is colored by the fact that it's gambling.

My vision is most colored by the fact that it is a phenomenally bad deal for the consumers, completely unlike anything that would come about in a free market. And now it's being privatized with this bad deal encoded into law.

Allowing that competition in the other example fields may be illegal, at least the government is trying to simulate what would happen in a private market. In fact in most of these cases, the government imagines it is doing better by fixing a perceived market failure.

In other words, competition is made illegal either because a minimum customer base is required to have supplier entry or because the total costs of multiple suppliers would be too high.

The lottery is exactly the opposite. A privately run lottery would return over 90% of the take to the consumer. But in order to have the state lottery keep 50%, the state makes the private ones illegal. Now the state proposes to encode this protection in its privatization, creating an honest to goodness, bad for the economy monopoly.

|1.24.07 @ 3:44PM|#

Wow, a government franchise just like in the olde days. "Please, Sir, may I operate a mine?" "Please, Sir, may I operate a steamboat company?"

Olde days? Try "please, Sir, may I operate an airline" if you're Richard Branson.

The Wine Commonsewer|1.24.07 @ 4:10PM|#

My vision is most colored by the fact that it is a phenomenally bad deal for the consumers

It's no worse than the deal they get now.

We're not arguing the merits of legalizing gambling or lotteries, which we both agree is the ideal.

Doug|1.24.07 @ 5:12PM|#

FYI,

There are riverboat casinos in Joliet, IL and there are also riverboat casinos in extreme NW Indiana. Both of these places are very close to Chicago, where the bulk of the Illinois population is located. Also Peoria, IL and East St. Louis, IL have riverboat casinos. If you want to gamble at a casino in Illinois, its not that hard to do.

RSDavis|1.24.07 @ 6:11PM|#

The best libertarians are not just after marketization, but competition. Although markets can lead to competition, they are neither a neccessary nor a sufficient condition, IMHO.
_______________________________________________


Competition can help utility, but is not neccessary. Even a non-government backed monopoly is subject to the powers of supply and demand.

- R

|1.24.07 @ 6:31PM|#

To be honest, I am neutral on the issue;

The government is not forcing people to buy the lottery tickets.* The people who chose to put money into the lottery had other things they could have spent the money on; food, gas, prostitutes, donations to PBS etc. They lottery is in free competition with all these other goods, and so it is subject to market forces.

This really is a monopoly privilege being traded from one group of people to another. Of course, I wholeheartedly support removing all barriers to gambling. This change though is much less significant, rearranging-the-deck-chairs-on-the-Titanic significant.

*Of course the government will never compel people to buy lottery tickets. When they do use compulsion, they like to keep all the money, so they just call it taxation.

|1.24.07 @ 6:59PM|#

I suppose I should have an attitude more like tarran's.

I have always been irritated by the lottery because it is an utterly illegitimate activity of government, at least so far as it forbids private competition with the lottery. It is not a fundamental function of government. It does not address or even pretend to address a public goods problem. It is simply illegitimate on its face.

Now the state plans to privatize this completely illegitimate function of government, including the enforced monopoly in an arena where there is not even a pretense of a natural monopoly. Super irritating.

|1.24.07 @ 7:17PM|#

Is the private lottery company still subject to the state corporate income tax on its lottery revenues? This could be a brilliant move by Illinois: get a big chunk of money now, then an additional stream of tax revenue later. Personally, I think 10 billion isn't nearly enough money compared to the size of Illinois government, and it's quite likely to be squandered, as governments almost always do with windfall revenues.

|1.24.07 @ 8:20PM|#

The game is a measure of a players aversion to risk, which, for DoND, is almost directly related to their bank balance.

By the way, this thread can't go by without recalling the great lottery skit on The Tracy Ullman Show...

Two lottery contestants win spins on the Big Wheel on TV. One is a rich executive whose secretary bought the ticket as a lark. The other is a poor maid who is a regular lottery player. The grand prize on the Wheel is 20 million dollars.

The maid asks the executive if they want to make a deal where if one of them wins the $20M, they split it. The executive replies that he doesn't want to do that deal because $10M would not change his lifestyle, but $20M would. "With 20 million I could have the airplane, the house in Europe. I wouldn't really notice 10 million."

Of course she wins and he doesn't. When asked if winning 20 million dollars will change her life, she replies, "Not at all. I'm still going to spend a third of my income on lottery tickets!"

Dave B.|1.24.07 @ 8:21PM|#

Expected value is not a good way to evaluate how to play a single instance of a game. It might be smart to try for a tiny chance at a large sum of money if you get to try as many times as you like, but if you only get one chance, you have to look at what your realistic chances of winning different amounts.

Consider the popular example of a coin-flipping game in which you start out with $1 and your money is doubled every time a heads is flipped, and the game ends once a tails is flipped. This game has infinite expected value, so you should be willing to pay any finite amount of money to play. But would you spend your life savings to play the game once? There's over a 99% chance that you'll win less than $100.

A more appropriate approach would be to look at the money in terms of the real world consequences. I don't watch Deal or No Deal, but a lottery ticket is a good purchase because its cost is essentially zero since it is very unlikely to affect your life negatively in any way, and you have a decent chance of winning at least some money, with the possibility of a jackpot.

Dave B.|1.24.07 @ 8:22PM|#

Expected value is not a good way to evaluate how to play a single instance of a game. It might be smart to try for a tiny chance at a large sum of money if you get to try as many times as you like, but if you only get one chance, you have to look at what your realistic chances of winning different amounts.

Consider the popular example of a coin-flipping game in which you start out with $1 and your money is doubled every time a heads is flipped, and the game ends once a tails is flipped. This game has infinite expected value, so you should be willing to pay any finite amount of money to play. But would you spend your life savings to play the game once? There's over a 99% chance that you'll win less than $100.

A more appropriate approach would be to look at the money in terms of the real world consequences. I don't watch Deal or No Deal, but a lottery ticket is a good purchase because its cost is essentially zero since it is very unlikely to affect your life negatively in any way, and you have a decent chance of winning at least some money, with the possibility of a jackpot.

|1.24.07 @ 9:17PM|#

This game has infinite expected value, so you should be willing to pay any finite amount of money to play.

In terms of the real world consequences, if the actual payout in this game is limited by, say, the GDP of the world, this game has an expected value of only $46. So, no, no one will imagine spending even a fraction of any finite amount they can gather to play.

But if you can guarantee the payout up to world GDP, I'll play for $50. I'm even okay taking the loss against expected value!

Dave B.|1.24.07 @ 9:45PM|#

But would you risk your net worth against a chance at the world GDP just high enough to result in positive expected value? I just used the infinite example because it most clearly illustrates a problem with expected value when used to determine strategy in a single game rather than several.

|1.24.07 @ 10:27PM|#

No, I wouldn't.

But given the decreasing marginal utility of more money, one could easily argue that even with an expected return of unity, a lottery ticket is a poor purchase because no dollar you can win will be as valuable as the one you bought the ticket with.

Then add in that the expected return is only 50%, and it starts looking pretty bad.

That said, if I'm playing Deal or No Deal and the million is still up there, I might turn down a greater than expected value offer just for the chance to say I won the million. If the highest value up there is the $750,000, I take the deal.