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.
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