The ABC System and deadweight loss

My latest research brief looks at how the ABC system chafes at its original founding rationale — controlling people’s access to liquor — and desires it really to be about profit-maximizing.

(In this respect, it’s similar to renewable energy companies under the 2007 Renewable Energy and Energy Efficiency Portfolio Standards law. Not one of the four founding reasons for the REPS law was to create jobs in the renewable energy industry, but ever since? That’s been the main justification used to keep the law.)

These two paragraphs should illustrate the deadweight loss in the North Carolina economy created by a government liquor monopoly:

In 2017, the ABC Commission reported a systemwide profit margin of 11.2 percent. That’s a very large margin for such a business. In license states, where private enterprises compete, profit margins are a lot tighter. After all, a high profit margin for a business in an area means someone else can open a competing business nearby and also profit.

In 2017, the profit margin of private beer, wine, and liquor stores hovered around 2.4 percent. Meanwhile, in North Carolina, only 19 of the 428 government-controlled liquor stores fell below that 2.4 percent profit margin seen in a competitive market.

As a reminder, I wrote earlier this year:

Turning a potentially competitive market into a government monopoly … creates inefficiencies, prevents many economic transactions that otherwise would take place, and creates deadweight loss.

I realize economic charts aren’t for the faint of heart, let alone the ache of head, but here’s the gist. All that area inside the pink triangle represents all the economic activity that would take place in a competitive system but doesn’t, because it doesn’t maximize revenue for a monopoly provider.

It represents the area of opportunity for competing providers to come in, serve consumers, and provide jobs and tax revenues of their own.

Since they’re not, and since this gap exists only because filling it would decrease the monopoly’s revenues, it’s called (a) deadweight and (b) loss.

Jon Sanders / Director of Regulatory Studies

Jon Sanders studies regulatory policy, a veritable kudzu of invasive government and unintended consequences. As director of regulatory studies at the John Locke Foundation, Jo...

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