Dan Leger’s article Liquor Store Lunacy: Time to privatize NSLC and the subsequent arm-chair economists complaining about government monopolies has me screaming for someone — anyone — to provide the public with a basic tutorial on public finance and policy. I suppose it is a great thing that people who find themselves going through a business degree, learning the very basics of theoretical microeconomics (you know, supply and demand, ‘invisible hand,’ OMG don’t mess with the markets. EVAR! theory) can take their learnings and become blowhard political pundits because of it. Such is democracy. But, it’d be nice to hear from some of the people who actually learned the very basics of public policy, the role of government in the economy, and that, despite what business gurus will tell you, everything is not about efficiency.
It just turns out that I took a degree in Public Administration, so am in a position to comment in general about public bureaucracy and the economy and when (and not when) it might be a good time for the government to get involved in the market.
For the record, I am in favor of the deregulation of beer and wine (not the privatisation that Leger calls for, which would just transfer the assets belonging to the NSLC to some private organization). I think the ability to sell beer and wine would give a little bit of stability to smaller retailers who could then complement their beer and wine with local goods and compete more effectively against the big box stores, providing more consumer choice and lower prices.
But, for the sake of argument, let’s just say that I’m a hard-line ‘NSLC should stay a crown corporation’ pundit. What lines of argument might someone use to support government control of a market? There are four major ones:
Some products, usually because they require a large amount of capital to produce, result in monopolies when left to free markets. A good example for this is electrical power. Usually the first company to open up a power grid in an area wins, and has a great deal of power to keep others out of the business. Generally, governments respond to Natural Monopolies in one of two ways – 1) taking ownership through a crown corporation (as was once the case a long time ago) or 2) regulation (which is the current case). Natural Monopoly does not apply to liquor, though. Liquor is a basic retail product. Check one for the liberatarians.
Products that can turn a profit usually have at least two traits.
First, they are rival goods meaning that one person consuming the good prevents another from also consuming it. A hotdog is rivalrous because if I eat my hotdog, it means you cannot. This (non-DRM’d) blog post, because it sits on a server, is non-rivalrous. You can read it, and so can everyone else.
Second, they are excludable, meaning that it is possible to prevent people who haven’t paid for a good from getting it. The hot dog is excludable, because it will sit on the Dawgfather’s barbeque until you give him the money (although rumor has it that he’ll let you pay him back later, no questions asked). Marine cod (in the water, not at the store) is non-excludable because you basically need an army to keep people from fishing the ocean.
Goods that are either non-excludable or non-rivalrous result in something economists call market failures. Because the market will not provide these on its own, some level of government involvement is necessary. For instance, copyright law is a way to get around the non-rivalrous aspect of an MP3 file. Selling fishing licenses is a way around the non-exclusivity of marine fish. In cases of both non-rivalrous and non-excludability (eg. National Defense), you usually have the government offering the service itself. Liquor is not a market failure. Score another for the libertarians.
Related to market failures is the idea of externalities. Externalities occur when an individual’s market behavior has an impact on others, distorting the market and creating inefficiency. The best example is pollution. Governments will tend to get involved in high-polluting industries because they can make everyone else miserable when making a profit for themselves. Sometimes the action is regulation, other times it’s taxation. Ronald Coase has a neat response to externalities as well – the argument is that if you assign property rights (through law), the market will adjust to the most efficient outcome. So, if the government decides that I own the lake I’m polluting, people effected by my pollution will pay me to reduce the level of pollution in the lake (and because I’ll make a profit, I’ll oblige). This is called Coase Theorem (not to be confused with another Coasean theory about the nature of the firm, oft cited by Clay Shirky).
It should be noted that externalities can happen in a positive way too. For instance, me writing blog posts provides the internet with much entertainment that I am not getting paid for, creating an externality and economic inefficiency. Coase theorem, therefore, would be one argument favoring the use of DRM to protect copyright.
The consumption of liquor does create an externality because public drunkeness, drunk driving, alcoholism, and poor judgement by intoxicated people can have a negative impact on the happiness of others. So, because liquor has this negative impact, it is fair for the government to assign property rights on drinking to a Crown Corporation, forcing business that want in on the business to pay for expensive licenses, high taxes and jump through complicated hoops to profit from liquor. This one is debatable, however, because government could also assign property rights to a private agency just as well. Let’s say score a 3/4 point for the Crown Corp side.
The strongest argument in favor of giving the rights to sell liquor to a private agency is social policy. In short, the goal of non-privatised liquor has nothing to do with economic efficiency, but instead addresses community concerns instead. The list for this is long, possibly exhaustive:
- to prevent the intoxication of minors, including the enforcement of age limits
- to reduce alcoholism
- to control the use of alcohol in the workplace (and prevent Health and Safety incidents)
- to reduce the possibility of promoting alcohol to minors
- to provide some level of public accountability for how the intoxicating effects of alcohol could be used to create profits (eg. the combination of alcohol and gambling comes to mind)
The argument here is not that governments prevent alcoholism, but instead that if alcoholism becomes a serious social issue, governments would have an incentive (and responsibility) to do something about it. In private hands, the public has less control over the degree of product that gets out to market and except for a little bit of brand damage (which would mean literally nothing to someone who is addicted to alcohol) no real clout to force said private agency or agencies to change their behavior.
The NSLC puts considerable money into campaigns against drunk driving. They are frank and to the point. In private hands, I would argue, such campaigns would be non-existant – and if they were somehow mandated, they would be purposely done to satisfice, rather than address the real public concern. We cannot forget that liquor is a drug – possibly the drug that is most responsible for death in Canada, not to mention being responsible for a wide range of other problems we have in our communities.
In short, the community has a strong vested interested in who gets to sell alcohol and who does not and despite silly marketing ploys, there are very good reasons not to privatise the NSLC. That’s about 10 points in favor of NSLC as a Crown Corporation, I would say.
Back to Reality
Despite, my rant pro-NSLC, I still favor some de-regulation of alcohol in Nova Scotia. I think the benefits that having beer and wine in small stores outweigh some of the social negatives I outlined.
My bigger beef is that libertarian ideology overrides common sense, when it should be the other way around. I can favor reduced government involvement in a lot of places for sure, but to suggest that there is never a good reason for a government to get involved, or to have a monopoly on a service (in reality, any government service *should* be a monopoly because ideally goverments should offer things that cannot already be provided by the market) is just plain false. There are a few cases where governments ought to be involved in markets, and the smart libertarian ought to discount these cases before calling for privatisation. Bureaucrats are not as stupid and lazy as your average Joe wants to make them out to be. It’s just that they do not have a whole lot of opportunity to bring the logic behind their decisions into the public forum. Maybe they should have more power to debate policy issues to the community. I am not sure how to make that possible, but it seems to be a fair comment in a society that expects increased accountability from the public sector.