Pennsylvania liquor stores are welfare maximizing

In many countries, and in particular North America, the state holds a monopoly on the sale of alcoholic products. And in those areas, everybody complains how inconvenient the purchase of alcohol is. Of course, this inconvenience is part of the purpose of these state monopolies, along with keeping prices high and keeping the margin for government coffers. But discouraging the consumption of alcohol does not need to be done this way, simply taxing it would achieve the same goals.

Katja Seim and Joel Waldfogel claim that at least in the case of Pennsylvania, the state monopoly is beneficial. Indeed, the layout of the network of stores, and the number of stores is much closer to maximize welfare than maximize profits. Now, of course, we need to define welfare. They measure it à la Hotelling: consumer surplus is based on the price of liquor and the distance between stores and customers, the producer surplus is based on profits, and there is a fix cost of operating a store. In other words, Seim and Waldfogel treat this problem like it would apply to any good. But we are taking about liquor here. And there is a reason we want to regulate it: it generates negative externalities.

Thus, if they find that in Pennsylvania the outcome is close to welfare maximizing according to their criterion, it tells me that there are too many stores if that social welfare measure included the negative externality of alcohol.

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