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From the Archives: Economist Antony Davies debunks arguments against liquor sale privatization

Economist Antony Davies debunks arguments against liquor sale privatization
August 5, 2010 5:12 PM MST

Based on studies he has done regarding the privatization of alcoholic beverage sales in other states, Duquesne University economist Antony Davies concludes that “the major opposition surrounds the social impact of privatizing alcohol. The conventional wisdom would say if you privatize alcohol, the state loses control, and you will see more social problems associated with drinking.”

Empirically, however, this is not true, Davies told the Charlottesville Libertarian Examiner in a telephone interview on August 5. He distinguished between levels of “control,” from the free-market systems that exist in most states, to moderate control (such as in Virginia, where beer and wine are sold by private businesses) to full control (such as Pennsylvania, where even beer and wine are sold by a state-owned monopoly).

No Substantial Difference
A 2009 study he wrote for the Commonwealth Foundation for Public Policy Alternatives (a Pennsylvania think tank) with fellow Duquesne economist John Pulito, resulted in these findings, based on statistics from 1970 through 2006:

Antony Davies Mercatus Center Duquesne University liquor law Virginia ABC
“….advocates claim that the social goals of reducing alcohol consumption, underage drinking, and alcohol-related traffic deaths justify controlling wholesale and retail alcohol markets.

“Evidence from 48 states over time shows no link between market controls and these social goals.”

Dr. Davies said in the interview that “we’re not seeing any evidence that greater control leads to better social outcomes.”

There is an exception, however, that Davies pointed out over the telephone: “DUI fatalities are significantly higher in states with more control than states with less control.”

Other factors, however, are different, he said. “If you look at per capita alcohol consumption, there’s no difference as you move from full to moderate to light control.”

Underage Drinking
As to claims that state-owned liquor stores are a better protection against selling alcohol to minors and underage drinking, Davies explained that people think “at a gut level” that private businesses “have an incentive to sell to minors. We see that’s not the case.”

Why not? “If alcohol is sold in the private market, the owner of the store has a profit incentive not to sell to minors, because if he gets caught, he loses his license. He wants to protect his business.”

Davies, who is also a visiting scholar at the Mercatus Center at George Mason University in Northern Virginia, concludes: “If you look at the data, there’s no clear pattern [that emerges showing] that imposing more control reduces underage drinking.”

Financial Arguments
In addition to the “social outcome” arguments against privatization, Davies said that “there are some financial arguments but they tend not to hold too much water.”

Those arguments, he said, “are pretty easily knocked down when you realize the state can continue to tax alcohol regardless of whether it’s sold publicly or privately.”

Davies pointed to legislation currently under consideration by Pennsylvania, which proposes to sell that state’s alcoholic beverage stores. “What’s pushing this [proposal] is the budget crunch. Selling the state store system would immediately raise the $2 billion necessary to close the budget gap.”

From the state’s perspective, Davies continued, “this is a win-win situation financially. The state can sell off its ABC system for a lump sum of cash and then continue to collect alcohol taxes and fees.”

As for Virginia, Professor Davies said he did a “back of the envelope calculation” after “looking at latest ABC statement of revenues.” Superficially, he said, “Virginia would lose about 30 percent of what it’s taking in” in operating profits.

What that doesn’t take into account, however, is lost revenue from Virginia customers who do their shopping in the District of Columbia, Maryland, West Virginia, and North Carolina. Nor does it account for the revenue increases that will result from private operation of liquor stores.

“Here’s why it may be revenue-positive,” he explained. “You achieve all these things – more convenient locations, more convenient hours, better customer service, so sales will increase. Plus auctioning off licenses” will result in previously unavailable revenue for the state.

Rent Seekers
Davies also addressed why one of the primary opponents of ABC privatization would be groups like the beer wholesalers, whose products are already sold in privately owned stores.

“Beer wholesalers,” he said, “are most against privatization of wine and spirits because it increases their competition.” By making comparable products more easily available to the same customers, “that’s going to eat into the profits of the beer distributors.”

In that regard, Davies offered some advice for voters and taxpayers who are paying attention to the privatization debate in Virginia:

“Generally speaking, the economists’ mantra is ‘follow the money.’ If you find someone arguing for or against a regulation, ask where he gets his money from.”

That seems to be a simple explanation of the motivation of some opponents of ABC privatization.

Publisher's note: This article was originally published on on August 5, 2010. The publishing platform was discontinued July 1, 2016, and its web site went dark on or about July 10, 2016.  I am republishing this piece in an effort to preserve it and all my other contributions to since April 6, 2010. It is reposted here without most of the internal links that were in the original.

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