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.

The Condorcet Paradox in Iron Chef Judging

Every year, Grace Christian Fellowship has an “Iron Chef” event where students are broken up into teams, given a secret ingredient and 30 minutes to create a dish to impress the "judges". Last night, the secret ingredient was eggs (my favorite food), and I was given the honor to be one of three judges.

Our judging process went like this: after each dish, each judge would rate it based on creativity, taste, and aesthetic. According to Simon Mujumdar, this is pretty similar to how he used to judge dishes on the actual show. After all the rounds, we came together to rank the six dishes as a whole using majority rule. This is really the Borda count voting procedure, where voters rank their candidates and the candidate with the highest number of points is declared the winner.

There were six dishes, but for simplicity of explanation, I will talk about three of them to explain how I experienced the Condorcet paradox in our judging process. One was an avocado toast with a fried egg and Trader Joe's (amazing) Everything but the Bagel Sesame Seasoning Blend (“A”), one was fried “angel” (deviled) eggs with a mystery sauce (“B”), and one was a burger with fried eggs as the buns (“C”). Each judge had their own transitive individual preferences, but we realized our group preferences were intransitive. To list out our individual preferences, mine were C > A > B, another judge’s were A > B > C, and the last judge's were B > C > A. As a group, that meant that we had the following intransitive preferences: A > B, B > C, C > A and there was no Condorcet winner.  We discussed in class that under such circumstances the outcome will be at best random, but at worst manipulative when the voting order is decided. Because this was a fun Friday night activity and we weren't making pairwise decisions, no one tried to manipulate the results and we arbitrarily decided on a winner. However, when teams wanted to know how their amazing dishes didn't win, we found ourselves explaining that we all liked different dishes and it was really hard to agree on a winner, and I had to hold myself back from trying to explain to people that there was no Condorcet winner in this competition.

A not-so-friendly neighbor dispute

My family and I moved from Caracas, Venezuela, to Vienna, Virginia, in the summer of 2006. Not knowing anyone in the area, we were lucky to find that our new neighbors were very welcoming. In fact, one of our closest family friends today was the first neighbor to welcome us into our new home. Oh boy, those were peaceful days! The joy and tranquility that we felt was cut short in the fall of 2013 when we were the ones with the task of welcoming our new next-door neighbors to their home. At first, they seemed like they were going to be a great fit in the community. However, one day they decided that they wanted to surround their whole house with a tall black metal fence . Once the project was complete, my parents were outraged at the prospect of having to bear the pain of looking at the ugliest fence, that I have ever seen, every day for the rest of our time in this neighborhood. Now, I realize that our misfortunes, due to their decision to acquire the fence, can be described as a negative consumption externality.

In other words, the decision to surround their home with a fence means that the social marginal benefit of living in the neighborhood now took into account the reduction of our personal marginal benefit due to the marginal damage caused by looking at the fence every day (SMB= PMB-MD). This decrease in SMB means that we now endured a very undesired overconsumption of the fence, since Q_AE is less that Q*. To attempt to mitigate the damage, my parents endlessly tried to come to an agreement with the neighbors to only fence their backyard. Unwilling to budge, we were ultimately forced to call officials from Fairfax Country to clearly define the ambiguous property lines between the two homes and to inform our neighbors that they were actually only allowed to place a fence around the backyard, not around the whole house.

We no longer speak to our neighbors, but our use of a coasian-like solution worked. Once the property rights were clearly defined, the neighbors agreed to only fence their backyard.  Luckily, the house is up for sale and we may end up getting rid of it once and for all.

Why Mr. Coppock Really Doesn’t Use Venmo: A Comprehensive Economic Examination/Roast

During our break in class this week, in response to Billy’s request to pay his auction debt immediately, Mr. Coppock proudly professed his unwillingness to use Venmo. To paraphrase, he said “as soon as any app asks for my bank account information, I’m out”. I was confused by this: why did an economics professor with little to no cybersecurity experience (a result of rational ignorance, of course) refuse to recognize the expertise of a digital financial services company owned by PayPal, which accounts for nearly two thirds of the online payment services market? Quite frankly, I don’t buy it: whether or not he knows it, Mr. Coppock is making a rational choice.

Perhaps, I thought, Mr. Coppock’s ignorance of mobile wallet technology was such that the only information in the space that was worth his time beyond basic name recognition was in learning about data breaches. After all, being able to discuss current events carries additional utility beyond the intrinsic value of understanding cybersecurity, so it would be rational for him to at least scan headlines whenever a major retailer’s database was hacked. Thus it is plausible that Mr. Coppock’s fear is a result of a high level of rational ignorance combined with a high proportion of fear-inducing information.

However, that explanation did not satisfy me; Mr. Coppock was simply too excited in his response, almost as if he were happy to share that he didn’t trust our silly digital wallets. He spoke like he wore a badge of honor, or… an “I Voted” sticker. With that realization, it became clear that I could apply the individual voter choice model to this decision making process.

Like a voter deciding whether to hit the polls, or a consumer purchasing a good, Mr. Coppock would use Venmo if the marginal benefits exceeded the marginal costs. However, there are some adjustments to be made to the original model.

E[MB] + D > MC

p|V1-V2|= E[MB]

 We recall in the original voter choice model, our marginal benefit was the probability our vote swayed the election times the benefit we would receive if our chosen candidate won the election. We concluded that E[MB] and MC were insignificant, and that the real reason people vote is D, the expressive and instrumental values of having voted. Now, to explain why Mr. Coppock does not use Venmo, we simply switch MC and MB:

E[MC] + D > MB

p|Coppock’s Bank Balance|= E[MC]

Now, MB is the utility gained from using Venmo, mostly from enhanced collection ability in all-pay auctions conducted in public choice classes. MC is the amount Mr. Coppock stands to lose if hackers break into Venmo’s encrypted databases and empty his bank account, and p is the probability that A. the hackers overcome Venmo’s security measures, B. that they take his money, and C. that it is impossible for him to recover it through his own legal action or Venmo’s corporate response. As an aside, I would also expect that a breach of this magnitude would prompt a response from major banks themselves, enacting fraud protection measures and further decreasing the probability that one would lose any money from a breach. Now, it could be argued that there are lesser consequences that are still irritating such as having to change passwords, but the expected cost of those is arguably insignificant even with a higher probability of being incurred.

So, this leads us to D: the expressive utility of not using Venmo, which acts as a cost because it would be lost were Mr. Coppock to finally give in and make a Venmo account. By refusing to adopt new technology, Mr. Coppock is able to hold himself above us careless millennials, and take pride in his own supposed financial security. 

P.S.

Interestingly, even by writing this blog post, I have increased D in Mr. Coppock’s equation: now, if he adopts Venmo, he will face additional social costs by bearing the shame of being wrong and proving me right. Therefore, I predict he will find some more evidence and form a stronger argument against Venmo’s security, increasing his expressive utility by doubling down on his earlier point. In this way, I have decreased his rational ignorance by questioning his knowledge and reasoning on the topic and creating incentives for him to spend more time learning about it.

Venezuela and its 1.6% margin

With elections coming up in the US, within my family, the recent conversations tend to revolve in reminiscing the times when Venezuelans were motivated and confident to vote in elections.     

The last major election in which Venezuelans thought it was irrational not to vote was in 2013 when the opposition leader, Henrique Capriles, lost to current president, Nicolas Maduro, by 1.6% … yes you read that correctly, 1.6%!!! Venezuelans were outraged and demanded a recount because for the first time in years the opposition felt that their individual votes actually had the potential to affect the presidential outcome. 

Prior to the 2013 election, there were various events in the previous years that had raised the cost of voting tremendously; social pressure to vote for Chavez/Maduro was effectively applied. Back in 2004 for example, there was a referendum to determine whether or not Chavez (Venezuela’s president at the time) should be recalled from office. Turns out that through simple majority rule, it was concluded that the majority of the population approved of Chavez and wanted to keep him as president. There was suspicion of fraud from the opposition who demanded a recount of votes, and in return the government publicly published a list of those individuals who had voted against Chavez. The list affected workers of PDVSA, Venezuela’s state owned oil and natural gas company, who were fired on the spot as a result of their name being on the list. From the government’s perspective, embedding such consequences in voting would mean that people could either abstain from voting because they did not want to face radical repercussions, or vote for the “correct” candidate ( in this case the socialist party).

This of course meant very high costs to voting in the following years, because revealing true preferences of presidential candidates could cost someone their current and future employment. However, in 2013 Venezuelans saw that the expected marginal benefit of voting also included other factors such as civic duty, expressive utility and above all the inherit utility of voting which could outweigh the marginal costs of voting. Individuals were publicly expressing their candidate preference regardless of the consequences, because in that moment, the marginal cost of voting was almost zero and the probability of a vote being a swing vote seemed too high. With the referendum in 2004, I would have imagined that the event would have discouraged Venezuelans of voting in future election, but surprisingly enough it did the opposite for the 2013 elections. Now time will tell when once again the expected marginal benefits will be far greater than its marginal costs.