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Brooks Wilson's Economics Blog: Missouri Powerball

Monday, April 26, 2010

Missouri Powerball

Chris Shaw won the Missouri Powerball lottery.  His winnings were reported as $258 by the state.  The figure is misleading; it is the future value of an annuity with annual payments over thirty years.  The lump sum or present value of his winnings is $125 million and this is the proper method of valuation. 

Truth in Lending laws prohibit lenders from misquoting the true interest rate on a loan by attaching up front fees on the loan and then lowering the quoted interest rate.  The laws require that lenders calculate and report the annual percentage rate which is calculated by a standardized formula that takes into account up front fees. 

The government at all levels seems preoccupied with practices of firms operating in a competitive market but never question their own actions.  In this case, the state of Missouri established a lottery, limited competition, advertised the lottery as a way to win millions and encouraged or at least tolerated misreporting of winnings.  Lotteries are a regressive taxes paid almost entirely by the poor and uneducated.  Almost all lottery participants are net losers.  The lottery as a tax fails to meet any criterion of fairness proposed by economists.  They are popular with users be better served if they were run in a competitive market environment that forced firms to pay out a larger percentage of its revenues to lottery participants. 
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  1. rebecca kolosci28/4/10 10:17 PM

    I totally agree. The lotto has a total monopoly on this form of gambling. They have no competitors, they falsely advertise winning values, but everyone in the government turns a blind eye. I must say I do play the Lotto but I am ok with having any portion of the winnings. However I do believe there needs to be some type of fairness in competition. Casinos have competitors therefore casinos with the Loosest slots, or highest paying tables do better then those that don't pay out much. The competition is healthy and keeps the consumer safe. Overall I believe the lotto has a huge unfair advantage I just cannot begin to think who is going to be able to compete with them now that they are so well established and well known.

  2. I agree. The lottery can be misleading at times especailly if you are a first time winner. Playing the lottery is out of totally unfariness in competition. Everyone other casino has competitors but not the lottery. This helps keep everything in line.