Alcohol In the Grocery Store!? The Rent-Seeking Produced by Pennsylvania's Liquor Laws

One of my most vivid memories from first year is walking into Trader Joe’s with my parents after a long afternoon of unpacking to find aisles and aisles of wine, beer, and other alcohol. I stood shell-shocked; alcohol in a grocery store?! Who had ever heard of such a thing? While to most, this may seem a normal occurrence, Pennsylvania, my home commonwealth, has very strict alcohol licensing laws. Before coming to Virginia, I had only rarely seen alcohol sold anywhere other than Wine and Spirit Shoppes, which have a monopoly on hard alcohol and wine in my home state.

According to this 2014 article, the market for liquor licenses in Pennsylvania is particularly interesting because it is one of 17 quota states. The quota system works by limiting the number of licenses per population. This limit on licenses predictably drives up the price of those licenses: in Philadelphia they go for $200,000 while in Utah they can sell for over $1 million. In non-quota states, the licenses cost about $500 in administrative fees. Owning one of these prized licenses, therefore, gives the seller considerable market power and incentivizes significant rent-seeking behavior. Unsurprisingly, there is evidence that current holders of licenses invest a non-trivial amount of money in socially wasteful activities -- lobbying against the expansion of quotas or other changes to the regulatory system that might lessen their market power or the value of their asset. Following our discussion in class, if Pennsylvania wishes to maintain its quota system, it should randomly assign liquor licenses or auction them off (in a non-all-pay auction) in order to avoid the waste of resources that this prevalent rent-seeking produces.