UK government considers a higher gambling duty to offset fiscal shortfall and tackle external costs

The government’s plan for a higher indirect tax on gambling firms highlights the tension between raising revenue and reducing market failure. Supporters argue it internalises the social externalities of problem gambling, improving allocative efficiency. Critics warn that an excessive tax could cut industry supply, cost jobs and push consumers to the shadow market. While Betfred’s Fred Done opposes the tax, citing shop closures, his family’s £2.9 billion fortune — built on gambling losses — raises moral questions. The debate remains whether the tax corrects a negative externality or simply burdens firms and consumers.

Betfred says all its shops may close if Reeves hikes gambling tax - BBC News

1. Explain what is meant by external costs in the context of gambling and give two examples of such costs.

2. Discuss how an increase in an indirect tax on gambling could help ‘internalise the social externalities’ associated with problem gambling. Use an MSC/MSB diagram to support your answer.

3. Evaluate the possible unintended consequences of raising the gambling tax for consumers, producers and government objectives.