Antony Davies: Why keep State Stores?

Nineteen states maintain alcohol monopolies in wholesale or retail markets. Looking to close budget gaps, some of these states, including Pennsylvania, are looking to hand over their alcohol monopolies to the private sector in exchange for a quick buck.

Between the sale price, annual licensing fees, and removal of workers from state retirement plans, it seems that there is little question that alcohol privatization is a wise financial move for the states. In fact, in Pennsylvania, the hotly debated question isn’t whether the state will make money from the sale but rather how much.

Residents, however, care about two other issues in addition to state finances:

Can the private sector sell alcohol more efficiently than the state?

Will privatization result in undesirable social consequences such as more underage drinking and increased drunken-driving fatalities?

At no point in history has government ever done anything more efficiently than the private sector. Anyone who has ever dealt with a public-sector entity knows that everything about these institutions — from hours of operation to parking, to accepted methods of payment, to business location, to what the customer must go through to complete a purchase — is designed to accommodate the employees, not the customers.

When it comes to limiting waste, minimizing bureaucratic drag, and giving customers the best product and experience at the lowest price, nothing beats the private sector. So, too, is it with alcohol markets.

Alcohol privatization will result in better selection, more convenient locations and hours, and a better customer experience, for the same price or better. Privatization will transform retail alcohol sales from the DMV model of customer service to the Wal-Mart model.

Consider some other government agencies with private-sector competitors.

The U.S. Postal Service, with almost $9 billion in losses in 2010, seems more like a health-care management provider than a mail-delivery service. In the same period, FedEx and UPS, the Postal Service’s private-sector competitors, made $4 billion in profit. Amtrak loses so much money that, in some cases, it would save money by shutting down its trains and handing out free airline tickets.

Just as important, privatization seems to result in better social consequences.

In my research with John Pulito for the Commonwealth Foundation, we studied 49 states over a 21-year period and compared the degree of alcohol privatization to drunken-driving fatalities.

Controlling for differences in seat-belt laws, blood-alcohol limits, and various other alcohol sales and use laws, we found that the rates of alcohol-involved traffic fatalities were lowest in states with the most privatized alcohol markets.

Looking at underage fatalities only, we found that states with the most privatized alcohol markets had alcohol-involved fatality rates that were the same as or lower than those in states with less private alcohol markets.

In a similar earlier study, we found no difference in the rates of underage drinking or underage binge drinking between states with privatized markets and those with controlled markets.

Opponents of privatization say the state needs to maintain its monopoly on alcohol sales because profit-seeking private store owners would have an incentive to sell to minors. In fact, the profit motive works in the opposite direction.

A person who has invested his money in a store and faces hefty fines, personal liability, and possible bankruptcy from serving minors has tremendous incentive not to sell to break the law.

By contrast, the state liquor-store workers have no personal investment and no personal liability on the line.

We know that privatizing alcohol markets will result in better customer service and a more efficient use of our scarce resources. Our research suggests that privatization will also have no deleterious social consequences. If states can make a buck in the process, so much the better.

Antony Davies is an associate professor of economics at Duquesne University and a member of the Mercatus Center’s Spending and Budget Initiative at George Mason University
E-mail him at antony@antolin-davies.com. His research can be found at http://mercatus.org/publication/binge-thinking