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

Regulations Brewing in Nova Scotia

The Government of Nova Scotia is currently welcoming input about provincial brewing and fermenting operations, colloquially known as “U-vint” and “U-brew.” Following the Nova Scotia Liquor Corporation’s (NLSC) allegations regarding on-site brewing and fermenting, which stoked province-wide debate, the Liberal government promised to introduce regulations that define what is, and is not, permitted.

“U-vint” and “U-brew” stores allow customers to make their own liquor on-site, offering a relatively inexpensive and convenient alternative to at-home kits and, of course, the province’s liquor monopoly. In addition to offering a popular service, for which demand is growing throughout the province, the success of small retailers is creating local jobs and generating economic growth.

Following legislative reforms in 2011, the NSLC pursued court action preventing businesses from allowing customers to use home-brew kits on-site. Last year, however, the agency acquiesced and it is, therefore, important that the provincial government delimit how to regulate this industry to avoid confusion in the future.

Encouragingly, the current Liberal government invited both the public and businesses involved to provide input and it is looking toward other provinces that regulate these operations to gain perspective on how best to govern. There is concern, however, that the government will adopt regulations that tax each litre produced on-site. For example, Prince Edward Island implemented regulations recently that impose similar taxes on U-vint and U-brew businesses, which many small-business owners in Nova Scotia surely fear.

However, an additional tax could dissuade customers and harm U-vint and U-brew business owners. Because the per-litre levy would apply only to incorporated businesses, not individuals, the added cost may very well persuade potential customers that the benefits of at-home brewing exceed the cost of on-site brewing altogether.

In addition to the economic consequences of levying a per-litre tax on small businesses, there are concerns about health and safety. For example, discouraging on-site brew operations provides an incentive for individuals to brew in their home, where safety regulations do not apply.

Nevertheless, the economic rights of, and safety regulations for, U-vint and U-brew businesses must be defined in order for these operations to continue. New laws restricting operations or increasing taxation, however, could harm small retailers that have found a profitable business opportunity that not only increases their own personal wealth, but also provides a service to Atlantic Canadians and creates local jobs and economic growth.

To encourage entrepreneurial spirit, which, when pursued successfully, generates employment opportunities, the government should implement policies that support new industries, as opposed to disfavouring them. This includes forgoing the opportunity to generate revenue by allowing businesses to deliver services to the market at reasonable prices, according to supply and demand, instead of imposing unnecessary restrictions that drive up the cost of production.

Now that public consultation has begun, members of the public have an opportunity to voice their opinions and demand a system that benefits consumers, while also safeguarding conditions that facilitate economic prosperity. There is potential for U-vints, U-brews, and other in-store breweries to expand, as a result, and this is achievable only through recognizing the right to provide services in the most unrestrained manner possible. Nova Scotia’s government is accepting input until 10 February 2014 and, by Spring, will announce what regulations it has settled upon. To voice your opinion or find out more about what the Government of Nova Scotia is saying in regards to U-vint and U-brew regulations, visit: http://www.novascotia.ca/finance/en/home/publications/uvintconsultation.aspx.

Rachel Lowe 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