CHAPTER SUMMARY. Properly done, cost–benefit analysis is a precise process for measuring the increase or decrease in house hold well-being attendant upon a change in economic circumstances. Cost–benefit analysis identifies and separates the components of utility change so that they are exhaustive and mutually exclusive. Here, we construct a theory to do that, interpret it, and explain how the derived forms apply to the expansion of casinos, an application that needs to allow for externalities. This chapter is notationally demanding, but the benefit is that once the methodology is completed, and the mathematics have done the work for us, we can be confident in the results. The main contribution of this chapter is the accurate listing of costs and benefits.

The literature on the costs and benefits of casino gambling is fraught with inadequacy and confusion. Even studies that purport to evaluate the economic impact of casinos commonly exhibit a great deal of misunderstanding about what should be included among benefits and costs, and provide little or no guidance about how the costs and benefits relate to one another or should be computed.