Alcohol, Social Harms, and the State: The Case for Privatizing the NLC

“Let us henceforth make war on all monopolies— whether corporate or union. The enemy of freedom is unrestrained power, and the champions of freedom will fight against the concentration of power wherever they find it.” – Barry Goldwater, The Conscience of a Conservative

The Newfoundland and Labrador Liquor Corporation (NLC) has, once again, increased the price of beer, wine, and spirits in the province. In an open market, raising the price of any given product is a decision that, among other things, reflects competitor pricing, however, the NLC and its provincial counterparts retain a monopoly on the sale and distribution of liquor products and consumers cannot purchase them from other retailers. Yet, it is not sufficiently clear why the provincial government is involved in the liquor industry and one must question whether the NLC should exist at all.

One justification for the existence of publicly-owned and operated liquor monopolies is reducing “social harms.” In other words, the state’s role is to protect individuals from the harmful effects of alcohol, which it can achieve through setting the price and regulating the sale of liquor products. By appealing to microeconomic theory and empirical evidence, however, the logic behind government-run liquor monopolies begins to crumble.

Regardless of whether individuals consume alcohol purchased from the government or from a private retailer, there exists some “dangers” associated with excessive alcohol consumption. Of course, alcoholism is a very serious illness with roughly 600,000 Canadians reporting a dependency on alcohol in 2002, but there is no evidence that government involvement in the sale and distribution of alcohol curbs this ailment. Furthermore, the link between alcohol consumption and prices is weak and there is little evidence that raising prices will discourage alcohol consumption. In fact, because alcohol is an inelastic product, dedicated consumers will not purchase less of it when the price rises (or when their income falls). Essentially, the NLC’s decision to raise the price of beer, wine, and spirits is unlikely to discourage consumption and will simply generate additional revenue, albeit at the expense of consumers (and their health).

An extension of the “social harm” justification for government involvement in the liquor business (and, correspondingly, the justification for limiting private sector involvement) is protecting children from early exposure to alcohol. In practice, there is at least some empirical evidence to support this arrangement. A study conducted in British Columbia revealed that private stores are more likely to sell alcoholic beverages to individuals who do not meet the province’s legal drinking age. (Conversely, a study conducted in Prince Edward Island, which recently made headway for private retailers to sell liquor at licensed establishments, found that government-owned stores were less likely to check for IDs.) Yet, it is not clear whether this finding justifies a government-owned and operated monopoly. It does illustrate a need for stringent regulations in the liquor industry and harsher punishments for retailers who break the law.

Of course, the primarily justification for government involvement in the liquor industry is revenue. Alcohol sales provide a significant stream of revenue for the provincial government–the NLC projects a $154 million profit in 2015. Thus, once again, the fact that the NLC generates revenue for the province does not justify its existence, particularly when actual operating expenses in that year reached $53 million, which reflects larger-than-average management and administrative costs, including generous employee benefits. Further, Prince Edward Island’s experience with privately operated liquor stores actually recorded higher revenues for their provincial government than under a solely publicly-operated model. If the provincial government privatized the NLC, taxpayers would no longer fund these excessive operating costs while the provincial government could actually increase their total revenues from liquor sales.

Government-owned and operated businesses are generally less efficient and less innovative than private sector counterparts and that remains the case with the NLC. Moreover, an appeal to evidence suggests that the state does not need to involve itself directly in the sale of alcohol to “protect” individuals and their children. As a result, it remains unclear why the NLC should remain an extension of the provincial government and the province should consider privatizing it.

Devin Drover is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics at Memorial University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

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