Liquor Store Privatization is a Balancing Act

What consumers should want to see in the final bill this fall.

Liquor store privatization appears to be back on the agenda in Harrisburg this fall, so this is a good time to start thinking about what consumers should want to see in the final bill.

While there's a lot of support for the general concept of alcohol reform, consumers need to pay close attention to the specific proposals because there's a conflict between what's best for revenues and special interests and what's best for the alcohol-buying public.

To kick off the conversation, here's my wishlist:

Supermarket Sales

While other states sell alcohol in supermarkets, bars, restaurants, and convenience stores without destroying the fabric of society, Pennsylvanians are restricted in their shopping options.

Beer is sold at beer distributors, but you can only buy cases. Six-packs are sold at bars, pizza shops and random specialty stores. The state has a monopoly on the sale of wines and spirits, and you can't buy them in other states or on the Internet.

If you want to purchase a bottle of wine from a restaurant, you have to open it up and take a sip first. But don't get caught driving home with the uncorked bottle!

It isn't clear how or why these inconveniences would do anything to promote responsible alcohol consumption. Their primary function is to inflate PLCB and beer distributor profits higher than they would be in a competitive market. It's well past time to get rid of them.

Uncap Liquor Licenses

As I've , Pennsylvania's policy of capping the number of liquor licenses available to bars and restaurants at 1 per 3000 people per County results in a lot of deadweight loss to the economy.

The licenses go for around $250,000, making it way too expensive for younger restauranteurs with good ideas to open a business if they can't access a large amount of start-up capital or credit. This is a real problem in the core cities, since they want to be nightlife clusters. Trying to hold down the number of bars only results in .

It's also not obvious what problem is solved by capping the number of restaurants who can have liquor licenses. Knowing that the restaurant next door also serves booze isn't going to make me drink more at the restaurant I'm at.

This is just rent-seeking from incumbent restaurants trying to shield themselves from competition. Neither consumers nor taxpayers benefit from fewer choices or fewer restaurants, so there's no reason for the state to enable this.

Market Prices

One problem with the Liquor Control Board system is that they use a flat mark-up to set prices. By contrast, private businesses vary their mark-ups by product because they know they'll make more money on some sales than others. Unlike the centralized LCB, they're able to make use of their knowledge of local preferences, based on supply and demand.

The current system distorts prices, making some wines and liquors more expensive in Pennsylvania than in other states for no good reason. Private retailers would do a better job of pricing alcohol at its real market value.

Where vs. How Much

What all these ideas have in common is that they move us away from regulating supply to regulating demand. If we let every restaurant sell booze, it's hard to see how this would lead people to drink more.

But prices do impact people's choices. When I'm deciding whether to buy another drink, it matters to me whether it's $4 or $8. If the market price for a beer is $4, but the state charges $2 in taxes to make it $6, that's going to impact choices at the margins.

Why do we want to regulate alcohol in the first place? The public health case is very compelling. Alcohol-related harms are very expensive. It's an addictive substance that's responsible for ruinous health problems, property damage, domestic violence and other social ills.

By far the most important objective for the new law is getting the right price level so that we don't see an uptick in consumption and related harms.  The focus needs to shift from regulating where alcohol is sold to how much alcohol is sold.

The best possible bill for consumers would combine a free market on the supply side (to maximize choice and convenience) with alcohol taxes high enough to hold consumption at the present level or lower. We should take seriously warnings from public health organizations that lower prices will increase consumption.

But we should reject the idea that inconvenience and a limited selection of products are necessary conditions for good public health outcomes.


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