The Efficiency of a Lottery as a Source of Public Revenue

The authors use a stochastic general-equilibrium model to study the efficiency of introducing and taxing lotteries. They calculate the efficiency gains from introducing an untaxed lottery, the efficiency gains from introducing a taxed lottery of the type observed in a typical state, and the efficiency costs of raising marginal public revenue using a tax on lotteries. Under plausible assumptions, the introduction of untaxed and taxed lotteries raises welfare, but taxes on lotteries are less efficient sources of marginal public revenue than are taxes on labor income.