The Truth About Alcohol Regulation

 

Last week’s reading of Stigler’s Theory of Economic Regulation got me thinking about regulations in the beer industry. The industry is heavily regulated and has a mandated three-tiered system, with wholesale distributors as middle men. This was created after Prohibition in an effort to control overconsumption. Critics of the industry (Stigler would be one) would tell you that wholesalers add no value to the industry and make undue profits. To this I have a few responses… 

First off, I want to say that the three-tiered system does benefit the consumer in that there is more variety to choose from. If there were no wholesalers, AB InBev (Anheuser-Busch), Miller-Coors, and Constellation Brands (Corona and Modelo) would control the entire market, pushing the small brewers out. To prove this, take a look at Coca-Cola and PepsiCo’s domination of the soda industry. Without distributors, the barriers to entry are enormous. Distribution is heavily reliant on economies of scale , and because of this new entrants would lose before they gain, which can be a risky undertaking. In the beer industry, new entrants do not need to make such large investments on the front end as they rely on distributors to take on those costs.

Secondly, I want to argue that the public safety of communities would be threatened without the three-tiered system we have in place today. Prior to Prohibition, there were what are called “tied-houses”. A tied-house is a restaurant or bar that is in some way obligated to a specific alcohol manufacturer. The manufacturer would offer deals such as low interest loans, discounted kegs, and free draft systems in exchange for being treated as a monopoly. This created dangerously low prices for beer. A worker could go into the pub and get intoxicated without making a dent in his paycheck (and workers did...often!). Industry giants were impossible to hold accountable when these tied-house saloons got out of hand. By contrast, the local, licensed wholesaler who by law cannot offer such deals can be very easily controlled. By using the wholesaler as a means to mandate higher prices and keep the industry in check at the local level, communities can ensure reasonably high prices that limit overconsumption. As we can all agree as economists, an increase in price decreases demand.

 

 I could go further into this topic, but given this is a blog post, I will stop here. Bottom line, wholesalers, while they do make a profit and benefit greatly from this system (they would be out of jobs without it), are not the only winners here. Consumers do in fact pay higher prices but this is for a greater good for society. On top of that, it is not all high prices and boring safety regulation for consumers: with the system craft beer can exist!

Special Interest Groups and "Dark Money"

When I read Gary Becker's assertion on page 102 that "the condemnation of special interest groups is excessive," I thought immediately of Rhode Island Senator Sheldon Whitehouse. Whitehouse (with a fitting name given his long career in politics) would likely disagree vehemently with Becker. The senator is perhaps the most vocal critic of special interest groups in Congress. He presses his Senate colleagues and other high-profile politicians to publicly disclose the names of their donors, citing concerns about "dark money." He alleges that when anonymous, private corporations spend millions on lobbying using "front groups and hidden money," they undermine the independence of the legislative branch and cement pro-corporate interests as top government priorities, no matter the negative consequences for average citizens. 

As a member of the Senate Judiciary Committee presiding over now-Justice Amy Coney Barrett's confirmation hearings, Whitehouse has made headlines in recent weeks for his accusation that "dark money" has infiltrated the Supreme Court nomination process. Becker might agree with Whitehouse on this point if the senator were to prove that "there is highly unequal access to political influence" among special interest groups targeting the judiciary with aforementioned "hidden money." If the groups that Whitehouse identified, including the Federalist Society and the Judicial Crisis Network, could "secure the implementation of policies [or Court rulings] that benefit them while reducing social output," then Becker would deem Whitehouse's condemnation "more justified."

On the other hand, some accuse the senator of hypocrisy for allegedly accepting anonymous donations from "dark-money" organizations himself. In the hyperlinks, I tried to present both sides of that particular argument, and will leave the class to form their own conclusions.  

  

The Meat Industry: Expert Rent Seekers

In late middle and early high school, I would spend a lot of my time watching documentaries and listening to podcasts about the meat and dairy industry in the United States. I found the intense hold they had over our government and our food choices fascinating. Our readings and lectures on rent seeking and capture theory made me realize that this is exactly what is going on. “Big Meat” (the name given to the meat industry) spends huge sums of money on lobbying every year to ensure their place in the US economy, even when the outcomes are inefficient. In June of 2018, Missouri passed a law that banned meat alternative brands from using words like “meat”, “beefy”, “sausage” to name or describe their products. Industry giants like Tysons and Perdue and major meat industry lobbyists were backers of the bill. South Dakota, Mississippi, Wyoming, and Louisiana followed suit shortly after. In Arkansas, the word “veggie burger” is banned. Laws like this are as a result of rent seeking and could be looked at as a form of capture theory (control over substitutes). Brands like Impossible Foods and Beyond Meat argue that their product is best advertised and described to consumers using the very words they are now banned from using. This could result in slipping sales for meat alternatives as confused customers turn to what they know - plain old meat. Stigler points out that the most effective way for an industry to ensure long run profits is to have barriers to entry. Legislation like this could be seen as a barrier to entry for new meat alternative brands. With limited ability to advertise accurately, potential new businesses might choose to quit before they even try.

This comes on the heels of falling meat sales and skyrocketing popularity for meat alternatives, especially as major fast food chains start to add them to their menus (Burger King’s Impossible Whopper). According to many surveys, the American public is becoming more aware of the extremely damaging effects of livestock, especially cows, on the environment. 14.5% of all emissions come from cows and ⅓ of the world’s arable land is used to raise livestock. Furthermore, many Americans now actively try to limit their (red) meat consumption for health purposes. 

In class, we learned that rent seeking is the diversion of resources from valuable places and instead spent on activities that have negative social value. In 2018, the animal agriculture industry spent $18 million on lobbying and $22 million on campaign contributions. This rent seeking money in order to keep profits up is being diverted from productive uses. This is money that could be used to find climate solutions or money that could be put into transitioning livestock land into land that grows soybeans (used in meat alternatives and reduces emissions significantly). Instead, it is being pumped into an industry that is arguably fading somewhat in relevance.

Regulatory Capture and Taxi Medallions

As Stigler points out, every industry that has the requisite political power will try to restrict entry. One of the most egregious examples is New York City’s taxi industry. In 1937, New York City began to issue taxi medallions, a license that a taxi driver is required to purchase to operate in the city. At the beginning of this program 13,585 medallions were issued at a cost of $10 each. Over time, taxi companies and independent drivers began to view their medallions as an asset and restricted new medallions from being issued. Despite an explosion in New York’s population, only two additional medallions have been issued since 1937. By 2013, the price for a medallion had risen to $1.3 million dollars. 

The taxi medallion example also demonstrates the consequences of an industry that can no longer limit competition. Because of the high costs of entry, New York taxis can charge higher rates than the competitive market would allow. In the last few years this has allowed Uber and Lyft drivers to undercut taxi rates without having to purchase a medallion. As a result of increased competition, the value of taxi medallions has plummeted to around $250,000. Those who purchased the medallions at their peak value are now left with a greatly depreciated asset. As this story demonstrates, regulatory capture has the potential not only to harm consumers, but also workers within the restricted industry. 

As this article points out a major argument in favor of taxi medallions is their ability to limit congestion. While congestion is an important negative externality to account for, it does not necessitate the use of medallions. New York City already places a congestion surcharge on every trip taken by taxi or ride sharing app. Another argument made in favor of medallions is that they raise the wages of taxi drivers. While this may be true, the use of medallions also puts forth massive fixed costs to enter the industry and burdens medallion owners with a risky asset.  

The Power of a Cup of Tea

 Today as I was trying to think of what to write about for my first blog post I found myself struggling with finding a topic. Every idea I came up with felt a bit forced and implausible. I was also having a hard time concentrating because my friend was playing an online game on their xbox. And then it hit me. The subject matter for my post was literally right in front of me. My friend was producing a negative externality with the amount of noise they were emitting while shouting at the tv and I wanted them to quiet down so that I could do my work. Now I just had to figure out how to fix the externality so that I could focus on my homework and have a happy ending for my blog post.

The living room is a public space with the seating and communal tv being public goods that I could not exclude my friend from using. So I had to think of another solution. I could just go do my homework in my room and that would be that but I know I work better outside of my bedroom. I landed on looking to Coase to find an answer. Coase says that I need to first see if the person producing the externality is liable for it. If they are then I can choose to force them to stop or I can accept payment from them that equates to what I have lost because of the externality being produced. If I couldn’t hold my friend liable then I would have to decide if I was willing to pay them to stop producing the externality. I started by determining if I had rights to a certain level of noise pollution in a public space. I found an article that stated that people do have rights to a certain level of noise pollution and that government agencies are responsible for regulating noise in workplaces. I had some legal standing to force my friend to quiet down but I certainly wasn't going to involve the state or local government in my little issue and I wasn't sure if I could argue that my living room constituted a workplace. If I couldn’t hold my friend liable for the externality then I would have to find a way to pay them to keep their voice down. I wasn’t just going to offer my friend money to quiet down because I’m a broke college student. What I do know is that my friend loves tea but they hate the work that goes into making it. Therefore I took it upon myself to make my friend some tea with the condition that they would lower their voice for the remainder of the time that I was using the living room. And might I just say that it worked beautifully. Ten minutes of work out of my day provided me with the perfect environment to work in, a happy friend, and an extra cup of tea for myself to get me through my homework.

It's Not a Public Restroom

I work at a local coffeeshop. For a time, the customer restroom was out of order, and some customers really didn't like to hear that. We have an employee restroom exclusive to the baristas, but some people would barge through to it as if it was a public restroom and ignored the signage. We now block off the entrance to that restroom with a heavy table, which isn't a perfect solution to exclude people from using it, but it works the vast majority of the time. It seems a lot of people think that restrooms should be provided as public goods by private businesses, and now that the customer restroom is fixed, we are noticing many people go back to use it who aren't customers. 

It is legal in most states for businesses to exclude people from using their restroom if the person is not a paying customer. Although, exclusion becomes more infeasible depending on how many people frequent a business, and this is a problem where I work. However, public restrooms are rivaled in consumption and access to a restroom could not be a pure public good, even if restricting access was completely illegal. The more people who use a restroom, the worse the experience will be for people trying to use it as time goes on until it is cleaned. There can also be a wait to use it, depending on the place. One survey says that 64% of Americans make the choice to be a patron at a business that provides a cleaner restroom over one that doesn't, and this is only possible by exclusion. Therefore, I personally don't believe that businesses should have to provide restrooms to the general public.

NBA Awards Voting Process

With the NBA season finishing up a few weeks ago, awards were distributed to the best players over the past season. There are individual based awards such as MVP and Defensive/Offensive Player of the Year, as well as team based awards such as First and Second Team Offense/Defense. Both individual and team based accolades are awarded based on Borda Count voting systems. Individual awards are voted on by over 130 members of the sports media, who rank their top players, assigning more points to higher rankings. The player with the highest cumulative point total wins. All-NBA teams are decided based on a similar Borda Count voting system, voted on by the 30 league coaches instead of the media.

 

Although the different award systems have independent voting bases and objectives, there has been uproar from players and the media who believe the voting systems to be overly complicated and sometimes unfair. For example, in 2013, Marc Gasol won league wide Defensive Player of the Year (DPOY), but then failed to make First Team Defense. As a result, some reporters have advocated for combining the voter bases and moving to a majority rule system, citing its simplicity and ability to prevent supposedly contradictory results. The economic analysis seems to indicate that the current system better represents league wide voting practices. While both awards recognize a player’s basketball strengths, there are clearly two sets of distinctly different preferences being expressed. The members of the media are voting for players that individually demonstrate their greatness, while coaches vote for players based on how well they mesh into a team environment. Secondly, combining the voter bases and moving to a majority rule system of voting would likely reduce the chance of choosing the Condorcet winner, the winner that defeats all others in pairwise elections. Public Choice analysis has shown the Borda Count method to lead to the Condorcet efficient outcome more often than Majority rule voting, as the number of candidates increases. Additionally, by pooling all voters into one voter base, the influence of any one particular member on the outcome is reduced. This could encourage rational ignorance, as voters are less likely to educate themselves when their chance of casting a decisive vote decreases. While to some, NBA voting practices might seem irrational, the current system best reflects the preferences for each type of award and likely leads to the Condorcet efficient outcome.

Why I Always Do the Dishes

  I think it's fair to say that most people hate housework. Taking out the trash is a nuisance. No one likes the sight of a sink filled to the brim with dishes. Yet the dishes still get done, the trash still gets taken out, these collective goods almost always get achieved/consumed at some point or another. This is because as the consumption of these collective goods is delayed, the benefit from completing them goes up. For example, the value of taking out the trash when it's empty is zero, but as more trash is thrown out the total benefit of taking out the trash. This means that the marginal benefit for each roommate to take out the trash grows as well until one roommate's marginal benefit exceeds their marginal cost of taking out the trash. This happens because, in the small interest group of my roommates, there becomes a point where the group shifts from an intermediate group to a privileged group. As Stigler suggests, a privileged group will have one person bear the costs and all members will receive the benefit, in this case, the taking out of the trash. However, the matter of who takes out the trash and bears the cost is uncertain in this instance.

  For my roommates and me, I always do the dishes. This is because I enjoy cooking and cook practically every day of the week. While my marginal cost of doing the dishes is about the same as everyone else, my marginal benefit is significantly higher. I need to be able to use the sink, whether it be for straining pasta or something else. Since my benefit is much higher, I reach the point of MB = MC much faster than my roommates and therefore end up almost always doing the dishes. This means that there is no incentive for anyone else to do the dishes because I reach this point faster than anyone else, and they can free-ride off of my actions. 

Deciding on a Movie

It’s Saturday night & I don’t have much work to do. In other words, it’s movie night. I tell my housemate Charlie I’m thinking about watching Phantom Thread, but Charlie says he actually wants to watch Chitty Chitty Bang Bang. Hmm… Chitty Chitty Bang Bang… not really what I want to watch tonight. We ask our 3rd housemate John to break the tie, but instead, he throws in a 3rd option: Avengers: Endgame!

Good news: I have a trick up my sleeve. I’m pretty sure I know everyone’s preferences, so I say: “Would we rather watch Chitty Chitty Bang Bang or Avengers?” Avengers wins 2-1. “Ok, now that we know that, would we rather watch Avengers or Phantom Thread?” Phantom Thread wins 2-1. (See diagram below). Just when I think I’m a genius, Charlie calls me out. I forgot I told him about the Condorcet Paradox, Vote Ordering, and Cycling not long ago (they would both rather watch Chitty Chitty Bang Bang than Phantom Thread). Seems like simple majority isn’t working. I thought about trying to reach a Coasian-esque solution by paying John (& Charlie) to watch Phantom Thread, but I concluded I wouldn’t like that since we have interdependent utility (I wouldn’t enjoy pressuring John to watch a film he doesn’t want to).

After realizing that each film imposes a moderately strong negative cost on the person who least prefers it, we begin discussing alternatives. We deliberated and watched trailers for about 30 minutes, checked lists that don’t match our Saturday night preferences, and scrolled through my personalized preferences on Netflix. Eventually we landed on Airplane 2.

In our household, vote-rigging gets called out & unanimity rules for movie selection. We would rather incur high decision-making costs to chose a movie we’ll all enjoy than chose one that only 2 of us will. We’re just a simple, 3 person household with vaguely interdependent utilities.

Rent Seeking: Is Lobbying Around for Good?

   Rent seeking is defined as when resources are spent to obtain rents, which derives from an activity that has negative social value. Lobbying falls under the rent seeking umbrella. The term lobbyists generally has a negative connotation surrounding it, and people often question the need for lobbyists. There has even been talk about banning lobbyists due to the shadiness that can be associated with the "industry." But, "...lobbying is not only constitutionally protected, it's fundamental to a working Republic. Lobbying gives people the power to petition the government." With an essential part of the government, Congress, and the law on its side, lobbying will not be going anywhere. Since lobbying will continue to be around, let's see how successful it is.

    Corporate lobbying has the highest return on investment. When a corporation spends one dollar on lobbying, they receive on average 760 dollars in federal support and tax savings. Based on that statistic, the return on on investment within corporate lobbying is calculated to be 76,000%! The lobbying process is inefficient and has negative social value since the lobbyists time, efforts, and resources could be better utilized by society elsewhere. However, it helps the people in an immense way who control the power to change the system. There are citizens trying to fight the system through petitions and get rid of the corruption that oftentimes goes along with lobbying. But, they are fighting an uphill battle. The dead weight losses and inefficiencies will continue until the individuals and corporations with political power stop making money hand over fight via lobbying.

The Capture Theory and the Airline Industry

 The capture theory states that regulation is sought by and acquired by and industry so that it can benefit that industry. The airline industry is a perfect example of this. There are hundreds (maybe thousands) of regulations on airlines in the United States. The basic purpose of all of it, is that no one can obtain a certification to fly commercially until they have met all of these criteria. The airlines have an excellent argument to make for these regulations: no one else can possibly fly safely without these regulations. This is a difficult argument to oppose and it results in the industry being strictly and increasingly regulated.

As a result of all of these rules, there are severe limits to entry into the airline industry. Meeting all of the requirements to obtain a license is time consuming and expensive: you must have adequate and functioning safety mechanisms on all aircraft, must pay for gates at an airport, must not use any copyrighted material, must train and hire enough staff to run your operation smoothly every single day without fail, etc. All of these things are strictly monitored by the FAA and failure to meet any one of them could result in not earning a certification. This enormous barrier to entry has immensely benefited the large companies within the airline industry (over 80% of the market is controlled by just four airlines).