The administration of Prime Minister Lee Hsien Loong seeks to "re-make" Singapore as a travel destination. It has invited tenders for two integrated resorts, including casinos. One will be located in Marina South to attract the meetings and convention business, while the other will be located in Sentosa Island to attract tourists. Typically, Australian governments have auctioned casino licenses for a lump-sum fee. By contrast, European governments have charged casinos a gambling tax.

(a) Suppose that a lump sum fee of $100 million per year and a 25% betting tax would raise the same revenue for the government. Suppose that the casino applies uniform pricing and that marginal cost of operation is constant at $1 per bet. Compare the two policies in terms of (i) the price of betting, and (ii) the volume of betting.

(b) Would you recommend that the government use the lump-sum license fee or the betting tax?

(c) Whales are people who travel worldwide to gamble on a large scale. Casinos compete to attract whales with special facilities, free air travel and accommodation, and other perks. How should casinos adjust the odds to whales relative to small-scale gamblers?