Ed Lotterman: Liquor sales limits pose economic trade-offs

Special to the Idaho StatesmanMarch 21, 2014 

Laws restricting when and where liquor can be sold often generate considerable political heat in one locality but are of little interest elsewhere. So my home state of Minnesota's current dispute over repealing limits on Sunday liquor sales may mean little in Idaho. But the economics of such "blue laws" are more complex and interesting than one might think. And they are a case study of how government action to solve one type of "market failure" often creates another.

Enacted to prevent what economists would see as the "external costs" of weekend liquor consumption, these laws, along with others that limited the number of liquor sellers in any given market, increased the chances of "monopoly power." And the whole kerfluffle serves to demonstrate other common economic phenomena, including "economies of scale" and "rent seeking."

Start with the rationale for banning Sunday sales of alcoholic beverages.

When enacted, the advocates probably did not have economics in mind. Many saw drinking as morally bad and thought banning it entirely would be good. In this campaign, the "drys" emphasized the costs to society from private consumption of alcohol. These included traffic and other accidents, family violence and costs of law enforcement.

Costs to society from private economic activities are what economists call "external costs." While advocates of laws to limit alcohol consumption didn't use that technical term, they did make an economic argument.

Limits on Sunday sales were within a broader cultural context that recognized Sunday as a day of worship and rest. Some states and municipalities prohibited most retail businesses from selling on Sunday.

However, all laws have unintended consequences, and one of the consequences of Sunday closings was to increase the profits of existing businesses.

Liquor retailing can be very competitive. It usually is a situation of what economists call "monopolistic competition" - a market that is nearly as competitive as the ideal of "perfect competition," in which no buyer or seller is large enough to have any pricing power. In many cases, the only factor that kept liquor stores from being in perfect competition was the fact that the stores and the products they sold did have a brand identity. They were not "homogeneous" commodities, such as the No. 2 yellow corn, 87-octane unleaded gasoline or A-37 construction steel, which meet the criteria for perfect competition.

In both perfect and monopolistic competition, sellers would be better off if they sold less and thus forced up the market price. But since any individual seller is small, it is impossible to get all the others to collectively rig the market the way a handful of steel or auto companies might. However, if some external constraint affects all sellers, the group as a whole may be better off.

In the case of limitations on liquor store hours, the effect probably would be more on the cost side. If allowed to open only six days a week, stores would save one day's labor costs. But demand for liquor is inelastic, meaning that the quantity bought does not fall much as price increases.

So total sales would not suffer, but net profits could be higher. Any one store would be foolish to voluntarily shut while competitors stayed open, but if all were forced to shut, as a group they might be better off. Conversely, if the ban is lifted, any one store owner would be foolish to stay closed on Sunday when his competitors are open.

So liquor store owners are not mistaken in their opposition to changes in existing law. They probably are correct that their sales won't increase much but their costs will. Profits will go down.

Economists define their lobbying for a law that increases their profits as "rent seeking" — the use of government to gain economic advantage compared with the outcome of a free market.

If the ban is lifted, consumers would benefit from greater flexibility when they shop. How valuable that is to society is hard to measure. If the increased satisfaction to consumers from ending the ban outweighs the decreased profits to stores, economic efficiency will be increased by ending the ban.

There is the question of whether Sunday sales will increase drinking and thus external costs. Given that on-premises alcohol establishments already are open, it is hard to see how total consumption would increase much.

Retailers also are correct that ending the ban might be less harmful to big stores than small ones. There are economies of scale in labor use in retail, and it often is easier for a business with a dozen employees to schedule fewer of them for a slow day than a small store.

Note that the trade-offs here are no different than when small retail lumberyards open Monday to Saturday faced competition from big-box building supply stores open long hours seven days a week. Ditto for myriad other retail categories.

Some European countries, especially Germany, long had tight bans on all Sunday retail sales and even on late hours. The argument was that workers deserved regular time with families but that, in the absence of statutory bans, competitive pressures would force all stores to be open many hours all days of the week.

Some people, including me, think this argument still has merit. Republican Sen. Rand Paul and other libertarians would disagree, arguing that a market free of statutory restrictions wouldn't compel people to work or to take a day off, that business owners would have that choice. I think this represents an unrealistic view of the market pressures placed on businesses, but the tide of popular thought is in that direction.

Write Ed Lotterman at boise@edlotterman.com.

Idaho Statesman is pleased to provide this opportunity to share information, experiences and observations about what's in the news. Some of the comments may be reprinted elsewhere in the site or in the newspaper. We encourage lively, open debate on the issues of the day, and ask that you refrain from profanity, hate speech, personal comments and remarks that are off point. Thank you for taking the time to offer your thoughts.

Commenting FAQs | Terms of Service