Monday 29 April 2013

Liquor traps

Gordon Tullock warned us that once substantial rents accrue to some regulatory provision, it gets hard to change the regulation even if it is spectacularly inefficient. He illustrated the case with New York's taxicab medallion system: the restriction on the supply of cabs doesn't help the drivers but instead drives up the price of the asset in fixed supply, the medallion itself. Abolishing the medallions would bring prices down for dispersed consumers but would impose substantial capital losses on the medallion-holders.

There is a way out of transitional gains traps: tax the winners to pay off the losers. But it's awfully hard to implement. Opaque transfers are opaque for a reason: voters do not understand them and regularly oppose things that would make them better off. Tullock's biggest lesson then is that we should never ever get into transitional gains traps in the first place as they are just so very hard to escape.

Today's edition: liquor permits. Cities like restricting the number of liquor outlets, reckoning that they can thereby reduce the number of problems caused by drunks. If the restriction is binding, then the licence to sell alcohol becomes an asset for the owner. If the restriction is really binding, it can be a really valuable asset. Witness Flemington, New Jersey [ht @MarketUrbanism]:
Local officials who want a more lively town center and a development team seeking to restore a landmark hotel were hoping to put a new watering hole on Main Street. Then they ran smack into New Jersey's strict, Prohibition-era alcohol laws, which restrict the number of liquor licenses per town. Flemington had just three—two belonging to establishments in strip malls and one for a Veterans of Foreign Wars hall.
Having a decent bar, it turns out, is helpful to reviving small downtowns, development experts say. So, in February, the developers came up with a novel but expensive solution, buying the Italian restaurant that owned a license and eventually transferring it to the downtown hotel. The price: about $1 million for the permit alone.
The Union Hotel owners' arduous journey to opening a bar is emblematic of a conundrum facing small downtowns across New Jersey. In a state making efforts to reverse decades of sprawling suburban development, a shortage of liquor licenses has emerged as a hurdle to rejuvenating Main Streets, according to development consultants and planning groups.
The ramifications have been felt across the state. Local officials in Glassboro, N.J., a South Jersey borough of about 18,000 people, said their $300 million public-private downtown development plan has been set back because it only has seven liquor licenses, with one changing hands recently for $700,000, said Joe Brigandi, the borough administrator. It has made it difficult to attract a new downtown restaurant, he said.
Meanwhile, Manitoba's emergence from the liquor dark ages is hindered by the existing rent-holders. The Winnipeg Free Press's Bartley Kives* documents the insanity of the prior liquor regulations, with 12 different highly prescribed liquor licences that often require venues provide services of negative value to their customers. Live music requirements ban the use of DJs for some licencees, for example.  But Kives also sees the transitional gains trap:
And more politically, the province isn't prepared to undermine entrepreneurs who've invested heavily in restaurant-lounge concepts such as Earls, Moxies and the Keg, which have proven extremely successful in recent years.
"We're not going to step all over people who've invested in infrastructure," said Chomiak, referring to independently owned restaurants as well as the chains.
In Manitoba, Earls-style venues have stolen the club-going clientele away from hotel beverage rooms, suggested Jim Baker, president and CEO of the Manitoba Hotel Association.
Decades ago, hoteliers opposed liquor-regulation reform in fear of losing market share to stand-alone venues. Today, hoteliers are more concerned about the prospect of legalizing alcohol-delivery services -- which would harm beer vendors -- than they are with the idea of more small clubs serving alcohol in downtown Winnipeg.
Baker said he would also like to see the province ease up on regulations governing minors in beverage rooms, especially in rural areas where banquets and fundraisers would present a business opportunity if people under 18 were allowed on-site.
"There's a need to see how these people can use the larger rooms for other purposes," said Baker, who cautiously supports the idea of regulatory reform. "We want to be part of this discussion."
Hotel, restaurant and club owners are also united in their desire to see liquor inspectors ease up on the enforcement of minor infractions such as improper paperwork. That sort of cultural change is coming as part of the creation of a new regulatory agency, Chomiak said.
There's a great Masters thesis to be written applying the Peltzman model of regulation and deregulation to liquor law in Manitoba.

New Zealand has been a minor oasis of sanity relative to these kinds of cases. Australia, as I understand things, has sufficiently restrictive liquor permitting laws in some parts of the country that people buy hotels just to be able to run the permitted liquor outlet attached to the hotel. I worry that NZ's move to greater local control of licensing options will wind up letting local activists restrict the supply of new licences, to the hoozahs of existing permittees, and move us into the trap. Read New Jersey and Manitoba as cautionary tales.

* When I was in Manitoba, I remember Kives having had the entertainment beat (though I could have that wrong; it was a long time ago). Now, every time there's a great piece in the Winnipeg Free Press, it's from Kives (and here and here). I wonder how long it'll be 'till he's scooped up by one of the national papers.


  1. I also don't like taxicab licencing, but Sinc's post there is a bit deeper than you're crediting him for. He's asking what functional purpose an existing and long-standing institution might serve if it isn't just rent-seeking cartel activity. He's applying a Wittman/Stigler critique.

    I think Sinc might look at some of the regs around taxis accessing Wellington Airport as reason for the shortage there though.

  2. I can't credit what I don't understand. However I readily acknowledge that this field is his speciality not mine.