Apparently the government has a new strategy for raising revenues: first declare that only the government can provide a service and then, after deciding that the private sector might actually do a better job of it, auction off the right to the highest bidder. Voila! The government gets a bunch of money and doesn’t have to raise taxes. I hate to sound like what everyone thinks that we sound like at Chicago but am I the only one offended—deeply offended actually—by the suggestion that Illinois is going to sell its lottery to private parties? My ire isn’t about private lotteries; rather it is about fake government monopolies and the hidden taxation that they represent.
I am not offended at the idea of having private parties running a lottery. I confess to a general libertarian instinct on these matters, but could be persuaded that we should have a little extra friction in this sort of market to protect consumers from themselves. No, my complaint is precisely that the government has introduced a monopoly where none is required and now wants to sell that monopoly right to a private entity. We obviously could have substantial competition in lotteries, competition which would drive payout rates—the government lotteries have notoriously low payouts compared to illegal “numbers” games—and game variety (though not being a lottery player I can’t assess well how the Illinois offerings stack up).
If a government imposes entry controls when competition would otherwise flourish, the government will almost certainly reduce overall welfare. It may boost the governmental fisc, as it might if it auctioned off a franchise to the highest bidder, but the resulting monopoly will exercise market power to the detriment of the citizens of the jurisdiction. Exactly how much harm will result depends on some assumptions about what happens to the franchise fee—the entry tax—collected by the government and how much the citizens value the resulting governmental expenditures. A franchise process of this sort can also transfer value from one group of citizens to a second. If you wouldn’t consume the services produced under competition, the switch to monopoly doesn’t harm you, and you might benefit from expenditures made possible by the franchise fee.
For a competitive product, the franchising regime is a disaster as it introduces monopoly where none would otherwise exist. That brings with it standard deadweight losses, plus the government gets a franchise fee that may be less visible to taxpayers—the incidence of the tax is more indirect—and thus less subject to being held politically accountable. And we should be especially suspicious of franchise schemes where there are likely to be differences in consumption levels across the citizens of the jurisdiction, as some citizens may benefit from the franchise scheme even if the average citizen is much worse off.