Don't Tread on Me Anymore

Costco, a membership warehouse chain known for its large discounts on a variety of items, also happens to be one of the largest retailers of wine in the world. However, due to alcohol regulation laws imposed by a majority of states, retailers of alcohol (like Costco) cannot buy directly from the manufacturer, but must instead purchase through a distributor. This causes the price of alcoholic beverages to be kept artificially high, that is to say not the price an unregulated market would supply. The two articles presented here describe Costco’s desire and ongoing efforts to deregulate the wine industry by cutting out the middle man (the distributor) and buying straight from the manufacturers (the wineries). If Costco is successful, it will be able to reduce the cost of the wine it’s selling substantially, thereby increasing quantity sold and profit made.

These articles reference a number of points that we have hit in class. First of all, there is a substantial amount of rent-seeking money involved in trying to influence alcohol distribution laws. Costco alone has spent over $500,000 dollars trying to change the law, while on the other side The Wine and Spirits Wholesalers of America have spent millions to keep the present laws in place. While it will undoubtedly by worth the winners’ efforts (in many billions of dollars for one industry or another), the loser will have wasted resources which could have been used elsewhere resulting in a dead weight loss to society.

Secondly, and more importantly to recent class discussion, these articles support George Stigler’s theory of economic regulation. Following the end of prohibition, the states were given the power to regulate alcohol in a way of their own choosing. This led to the creation of wine (and other alcoholic) wholesaler industries which have become powerful players in today’s political and economic landscape. Because industries engaged in political markets, such as distributors, are rational, it is normal (according to Stigler) for them to seek regulation as a way of increasing profit. ABC stores enjoy the price regulation that the government currently provides as it creates for them a de-facto monopoly. It is rational for industries that have the influence to seek regulations to do so. While Costco might seem like a counter-argument to Stigler’s theory (by their efforts to deregulate the wine market), Costco is simply acting in the rational manner Stigler describes – that is, Costco is seeking to deregulate because the current regulation is hurting them. Should Costco succeed, it would be rational for Costco to seek different kinds of regulation perhaps in the form of entry controls to the market (I believe Costco and Stigler would agree).

Rent-Seeking and Economic Regulation Hurts Those in Mourning in Maryland

This 2006 article from the Baltimore Sun discusses how expensive funeral services are in Maryland (not to mention everywhere else in America) due to an early 20^th century state law that was passed in order to protect consumers from unreliable morticians; the article goes on to reveal that this law is actually popular amongst funeral business owners today in Maryland because they can use it to prevent legitimate funeral service businesses from opening up around them. The author of this article states that “funeral directors couldn't engineer this protection by themselves; they've had help from state lawmakers who have prevented attempts to reform the funeral laws. Few Marylanders are aware that one of Annapolis's more generous political benefactors is the Maryland State Funeral Directors Association.”

With this quote, the problem of rent-seeking within the funeral service business in Annapolis, Maryland becomes obvious. In terms we have discussed in class via Tullock’s chapter on the topic, because of the monetary gains that can be obtained from keeping regulatory state laws in place, there is an incentive for funeral business owners today to give money to the Maryland state government (aka spend resources on rent-seeking expenditures), and thus money is spent away from the natural direction of the market. Funeral home owners have fought innovations in the funeral service business that would lower funeral costs by “working with their politician friends…they have defended and strengthened anti-competitive funeral regulations aimed at stemming the tide of Internet casket sales, the expansion of funeral home chains and the popularity of cremations.”

In this rent-seeking case in Maryland, resources were wasted trying to obtain the “rent” of regulation to entry in the funeral service business. Therefore, I also felt as though this article was interesting because it provided a real life example that tied Tullock’s article on rent-seeking to Stigler’s article on economic regulation. The author of this article states that “people usually think that businesses dislike regulation. But businesses often find it profitable to have regulations crafted to impede would-be competitors. This allows politically well-connected businesses to charge higher prices and manipulate consumers' choices.” With this quote, Stigler’s argument of how businesses like government regulation because it gives them market power and control is proven. The funeral business owners give money to the government (rent-seeking) in order to make sure that it is hard for new funeral service businesses to open up and therefore their prices can stay high (theory of economic regulation).

My question after reading this article is, how will this cycle of rent-seeking and unnecessary regulation over entry into a market be fixed? Or will people in Maryland just always have to pay more for their funeral services?