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

Free-for-all, free for none: Campaign financing in Newfoundland and Labrador

The past year has shaken Newfoundland and Labrador’s political parties significantly. Former Premier Kathy Dunderdale’s resignation prompted the Progressive Conservative Party to begin searching for its new leader; the Liberal Party elected its new leader following a long and expensive campaign; and infighting forced the New Democratic Party to perform a leadership review, scheduled for this May.

Chaos at the top of Newfoundland and Labrador’s three major political parties happened to spark debate about provincial campaign financing rules. In the Liberal leadership race, candidates could accept donations of any amount from individuals, corporations, and unions, had no spending limits, and did not have to disclose the origin of donations made to them. Election rules are similarly scant. There are no donation limits, although there are spending limits: candidates can spend roughly $4.30 per elector in each district.

In a democracy, candidates must convince voters why they are suited to govern and campaigning allows the former to provide the latter with information necessary to make a decision at the ballot box. Winning requires candidates to compete with each other and persuade voters in their direction, whether by connecting with them through advertisements, lawn signs, websites, phone calls, or knocking on doors. Politicians need money to make these connections, though, which is why strong financial support is a primary determinant of candidate success.

Unlimited campaign contributions harm Newfoundland and Labrador’s democracy. They allow candidates to rely on a few large donors for support and, in some instances, permit those donors to fund their own campaigns. In many ways, small groups have more influence over policymakers than do individual voters. Reciprocity, however, is instinctual, and even if it was not, politicians must keep their donors happy if they depend on them for re-election. Moreover, unlimited campaign financing allows affluent candidates to use their personal wealth as an electoral advantage.

The lack of rules governing leadership races is of even bigger concern. In the most recent provincial by-election, candidates were permitted to spend $42,278. This is a large sum of money, but it is not insurmountable for candidates with some of their own money, a respectable donor base, and party support. But the “capital requirement” of a leadership bid is prohibitive for all but the wealthy. In the Liberal Party of Newfoundland and Labrador’s 2013 leadership race, for instance, two candidates spent over $400,000. Much of this came from their own pockets.

Only candidates willing to spend large sums of their own money, or those with donors willing to fund their campaigns, stand a chance to lead one of the province’s main parties, which gives wealthier individuals an advantage or holds leadership accountable to large donors. (Moreover, leadership candidates do not have to disclose their donor lists, exacerbating the situation.) Until the situation ceases, parties will not have an incentive to reduce their own spending or contribution limits to reasonable levels.

The problem is not, strictly speaking, that wealthy people have too much power in politics. Even if corporations, unions, and individuals represented the interests of those without their own wealth to spend on campaigns, their ability to almost singlehandedly fund campaigns makes politicians more accountable to a few voices than to many. Without contribution limits, groups representing people control elections rather than people themselves. This weakens the connections between voters and democracy’s outcomes.

The Government of Newfoundland and Labrador should, therefore, institute a campaign financing regime, similar that of the federal government. It should cap contribution limits, extend its financing laws to leadership elections, and ban corporate and union donations. Taking these steps would make democracy in the province less accountable to money and more accountable to voters.

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

 

Preventing Crisis: Newfoundland and Labrador’s Electricity Shortage Examined

Earlier this month, Newfoundland and Labrador (NL) experienced what many called an “energy crisis,” when issues in a switchyard, combined with rising demand for power with to the onset of winter weather, led to a shortage of electricity. NL Hydro, the provincial crown corporation responsible for generating and supplying electricity throughout the province, staged rolling blackouts across NL to address the shortage.

Nevertheless, the province’s recent energy shortage raises two questions: first, how should government address short-term shortages? Second, how can it prevent shortages in the future?

When demand for power exceeds supply at full capacity, a number of outcomes are possible. First, rates could rise to a level at which individuals consume less energy, mitigating the shortage. However, the government, or an agency established by the government, typically sets rates to prevent monopolistic behaviour, ensure affordable power, and allow families to budget their energy usage without worrying about fluctuating supply and demand. Additionally, electricity tends to have inelastic demand, meaning that consumers do not reduce their usage significantly when rates rise (nor do they increase their usage when rates decrease). This is especially true when these consumers know that the rate increases are temporary. Indiscriminate rate hikes, therefore, would have to be particularly severe in order to adequately reduce consumption in a crisis.

The alternative–rolling blackouts–has its own flaws. When the market rate for electricity rises above the fixed rate during a crisis, shortages develop because of the lack of incentives for consumers to reduce their consumption. Power providers often use periodic blackouts in certain areas to deal with this shortage. Under such a response, those who value electricity dearly have no way to buy it from those who do not care about it all, since it is distributed by chance and not need.  Someone who wants to watch a movie, for instance, might receive power while someone writing an important paper might not, despite the fact that the former might value the electricity he uses much less than the latter.

Thus, there is little that NL could do about the disaster earlier this month. The real problem lies in the fact that such an incident is possible in the first place.

NL’s provincial government could address this possibility in a number of ways. First, it could open its grid to private generators. These businesses would see an opportunity to profit from the vulnerability of NL Hydro’s generating stations by offering their own power.

Alternatively, the provincial government could privatize Nalcor, NL Hydro’s parent company. Premier Clyde Wells first proposed privatizing the province’s energy utility over twenty years ago, which would have allowed it to operate more efficiently and respond to NL’s energy needs by freeing it from the political vices that pull it away from meeting its mandate. The Public Utilities Board (PUB) could continue to regulate the newly privatized Nalcor, though, ensuring that it does not use its monopoly status to boost rates. And as the recent Muskrat Falls debate revealed political discussions about energy policy tend to distract from the economic rationale for the Crown Corporation’s development decisions.

There are few reasons for not pursuing both reforms. In fact, they would decrease the likelihood of mishaps similar to this past month’s from recurring. They would also open up NL’s electricity market to new suppliers, thus, preventing the risk of shortage and allowing NL Hydro to make decisions based on the needs of the province’s residents, rather than the whims of St. John’s politicians.

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