"Sometimes we think that regulation is going to mess up the efficiency of markets. But markets left on their own can deliver inefficient results in some circumstances, and here’s a reminder that not every regulatory intervention is inherently inefficient."

 —Joel Waldfogel

If governments were in the business of providing goods and services to consumers, how might their approach compare to private businesses? By studying a market controlled by a government entity, Professor Joel Waldfogel observes how government monopolies differ from free market economies.

In a recent study, Waldfogel investigated the liquor industry in Pennsylvania, where the sale of wine and spirits is governed exclusively by the Pennsylvania Liquor Control Board (PLCB). He examined how the PLCB locates its 600 liquor stores, staffs each store, and sets prices, then compared the figures with private liquor distributors.

He noticed three key differences: First, Pennsylvania has fewer stores per capita than private states. Second, stores are spaced more evenly throughout the state. And third, the PCLB’s operating costs are far higher than stores in private states, mainly because it employs union workers who earn higher wages.

"We find the PLCB is behaving as if it were trying to maximize the welfare of the residents of the state, but only from the standpoint of having high costs. Given those higher costs, the PLCB locates the stores in the interests of serving consumers," he says.

According to Waldfogel, these findings suggest that not all government regulations are inherently inefficient for the economy, nor for the consumer.

"By and large we’ve decided that we’re going to organize economies through markets. But this is one of a number of studies that shows the pluses and minuses associated with organizing an activity via markets, purely versus via regulation," he concludes.

In light of this discovery, Waldfogel points out the benefits of government-run liquor retailing that takes place in some parts of Minnesota. He says municipality-run liquor retailing raises the availability of the product to consumers in small and isolated towns, while limiting the number of stores.

 

“Public Monopoly and Economic Efficiency: Evidence from the Pennsylvania Liquor Control Board’s Entry Decisions”
Seim, Katja, Waldfogel, Joel, American Economic Review (2013)