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

The Wages of Sin: On Alcohol and Tobacco Taxes

People commonly associate politicians with taxes, drink, and debauchery. ‘Sin taxes,’ which are often levied on physically and, allegedly, socially unhealthy products allow policy makers to combine these fixations. Motivated by a desire to discourage excess and harmful decisions, governments target tobacco and alcohol with such excises.

The assumption that sin taxes meaningfully reduce consumption of unhealthy products buttresses the notion that these taxes protect individuals from damaging themselves and society. Intuitively, this assumption seems reasonable: people weigh benefits and costs in making decisions and, thus, increasing taxes correspondingly increases the cost of consumption.

But to what degree?

‘Sinful products’ typically have inelastic demand–that is, price increases generally do not reduce how much people consume them. This allows alcohol and tobacco companies to push the tax burden onto the consumer by increasing prices without selling substantially less wares.

Rather than significantly curb unhealthy consumption, therefore, sin taxes increase costs for those dependent on addictive products.

General sales taxes, for instance, tend to be regressive. Furthermore, taxing goods on which many vulnerable people feel compelled to spend their money is even more regressive. This is especially the case for addictive cigarettes.

Evidence suggests that individuals purchase increasingly potent variants of alcohol and tobacco as prices rise. When individuals have less access to the products they demand, they are more willing to surrender their health and comfort to get the most out of any given product. In the case of alcohol and tobacco, it is the physical stimulation provide by these drugs. As a result, individuals respond to price increases by purchasing stronger and lesser-quality alcohol and tobacco.

Higher consumer prices affect desperation in a myriad of other ways. When government-approved products are inaccessible due to their high prices, for example, individuals may turn to black markets in which targeted goods are even more dangerous (and in which criminals receive the profits). Unfortunately, for consumers, contraband tobacco and alcohol is especially risky.

Suppose, however, that sin taxes do reduce consumption of unhealthy goods. Is this a favourable outcome?

Those who dislike booze and cigarettes can choose themselves to abstain. There is no need to force this preference on others. In addition, as long as drinkers and smokers harm themselves only, advancing public goods to restrict choice in this manner is untenable.

However, what of people who cannot control themselves?

Alternatives exist for reaching out to addicts seeking help without burdening casual users. Take limits, for instance, chosen by individuals but enforced by states, such as Missouri’s voluntary blacklist for gamblers. A similar policy, such as an opt-in for alcohol and tobacco restrictions, respects individual agency while also addressing the potential harm of poor choices.

On balance, sin taxes often harm those they intend to safeguard while also restricting individual choice. Canadian governments should scale them back and take note of the benefits. I am confident that such policies, if implemented, would speak for themselves better than I could.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute