The Economics of Lottery Operations


A lottery is a gambling game or method of raising money in which tickets are sold for the chance to win a prize. The winners are chosen by drawing lots. Lotteries are popular around the world, and the prizes can range from cash to a new car to a unit in a subsidized housing project.

People spend billions of dollars on the lottery every week in the United States. Some people play for fun and others believe that winning the lottery will give them a better life. But the odds of winning are very low and playing the lottery can have negative consequences for the poor and problem gamblers. This article looks at the economics of lottery operations, and discusses whether promoting this form of gambling is an appropriate function for state governments.

The first step in establishing a lottery involves selecting the number of prizes and determining their size and frequency. A percentage of the total pool is set aside for administrative costs and profits, and the remaining funds are distributed to winners. In many cases, the prize amounts depend on the popularity of the lottery, with ticket sales increasing dramatically for rollover drawings and dropping off quickly for non-rollover drawings. In addition, a lottery must decide whether to offer a few large prizes or numerous smaller ones. Many states are unable to make this decision because of the pressures of convenience store operators and other suppliers (who contribute heavily to state political campaigns) and teachers (in states where lottery revenues are earmarked for education). The result is that few, if any, states have a coherent gambling policy.