Monday, August 26, 2013

Prohibition in Ontario: A Brief History & Current Analysis

Also available at

There is only one way Ontarians can buy alcohol for private consumption. You can’t buy beer at the bar and then take it home – like in Alberta. And you can’t buy beer at the grocery store – like in Quebec. In Ontario all alcohol consumption is either through the government owned LCBO or The Beer Store, a cartel of large brewers* who have a government-backed monopoly on the exclusive sale of beer.
It all started when the Temperance Movement gained political steam. By convincing politicians that alcohol was sinful, provincial governments started interfering with the nature of alcohol production, rather than influencing the terms of exchange (i.e. price controls, higher taxes, etc.). Quebec was the only province exempt from prohibition, having imposed it in 1919 but quickly backsliding after civil opposition. Prohibition in the other provinces, however, prevented consumers from purchasing alcohol, thus interfering with their ability to satisfy their most urgent wants. Alcohol producers were prevented from selling in their field; going out of business and having to look for earnings elsewhere. Alcohol prohibition was an economic disaster and its effects are still with Ontarians today.

The only ones who really benefited from alcohol prohibition were the government bureaucrats who gained from tax-created jobs that are created. The proponents of the Temperance Movement also gained since their goal was achieved – alcohol was outlawed. More particularly, women successfully – perhaps for the first time in history – wielded coercive power over men. From the standpoint of consumers and producers, however, prohibition was a loss, both monetarily and psychologically.
Obviously, alcohol prohibition created the establishment of a “black” market. The black market caused difficulties due to its illegality. The supply of alcohol was scarcer and the price was higher to compensate the producers for taking the risks of breaking the law. The stricter prohibition enforcement became, the scarcer alcohol became and the higher the price went.
The illegality also hindered the marketing and advertising of alcohol. Thus, the organization of the black market was far less efficient; consumer service declined in quality and prices were higher than they were under a free “legal” market. The need for secrecy in the black market also mitigates against large-scale business. Thus the advantages of big business are lost further insulting the consumer and again, raising prices because of the diminished supply.
Along with government bureaucrats and Temperance feminists, the benefactors of prohibition included the black marketeers. These entrepreneurs were different from those in the legal market. Black marketeers found rewards in bypassing law enforcement or bribing government officials. Prohibition in, not only Ontario but all of North America, saw the rise of the Mafia as significant force in social relations.
Although absolute prohibition was acknowledged as an absolute failure, the Ontario government continues to this day a form of prohibition by restricting the production of alcohol to several large breweries and distilleries. This is what the LCBO and The Beer Store boil down to – a modern-day relic of the prohibition age.
The Beer Store is the store-front of a cartel called Brewers Retail. Formed in 1927, this cartel is privileged by the Ontario government to exclusively engage in the production and sale of beer. Brewers Retail aren’t a monopoly, but rather a state-backed oligopoly – much like Canada’s telecommunication giants or the Chartered banks. It is fair, however, to call it monopolistic. Competitors are barred by violence from entering the brewery business, and consumers are prevented from purchasing their products from producers whom they would freely prefer. Although a monopolistic grant is obviously antisocial, it is often cloaked in the Orwellian notion of “general welfare.” As Logan Albright puts it,
Citizens are constantly told via antitrust laws that monopolies and lack of competition are bad, detrimental to consumer welfare and stifling to innovation. Yet, when the state wants to limit competition using legal prohibitions rather than mere market power, we are supposed to calmly accept it as part of the social contract. The very fact that Ontario requires the threat of legal action to enforce its liquor monopoly shows conclusively that it does not adequately serve the needs of the people. If the state really were the best and most efficient retailer, consumers would patronize it voluntarily, and potential competitors would fail due to the inferior nature of their business models.

 The Beer Store has a monopoly price, this is evident since there is no free market in beer production and consumption. On the free market, every consumer demand curve is elastic, that is above the free market price. Otherwise firms would have incentive to raise prices and increase revenues. The grant of monopoly privilege renders the consumer demand curve less elastic for consumers that have been deprived of other products from other would-be competitors.
Elasticity of demand is an important economic concept which defines the change in the quantity demanded that result from a change in price of a good or service, such as alcohol. More specifically, elasticity equals the percentage change in quantity demanded divided by the percentage change in price. It is ultimately based on individual’s subjective preferences, measuring the sensitivity of the buyers in the quantity they demand of a good to a given price change. An elastic response occurs when a percentage change in price results in a larger percentage of quantity demanded. For example, where the demand curve to Brewers Retail remains highly elastic (that is, more people demand beer due to price changes), the cartel does not reap a monopoly gain from the grant. Consumers and competitors are still injured due to the prevention and regulation of their trade, but Brewer Retails will not gain because their price and income will be no higher than it was before. On the other hand, if the demand curve is inelastic (that is, a percentage change in price results in a smaller percentage change in quantity demanded), Brewers Retail now has a monopoly price to maximize revenue. In a nut shell: production is restricted to command a higher price.
The restriction of production and the higher price for beer injure the consumers. Due to the Ontario government, consumers cannot purchase alcohol freely from those willing to sell. Any approach toward a free market equilibrium price and output benefits consumers and producers. Anyway movement away from this free market price and output injures consumers. The monopoly prices of Brewers Retail are obviously not free market. They lower output and raise prices beyond what would be established if they had to compete in a free market, that is, if consumers and producers could exchange freely.
Officially, Brewers Retail is a non-for-profit entity, but a recent study by Professor Anindya Sen of the University of Waterloo revealed that the government-backed cartel brings in as much as $700 million in “incremental profits” each year. Profits are short-lived and eventually reduce to a uniform interest return. All returns are eventually imputed to some factor. But what is the factor in the case of Brewers Retail or the LCBO? The factor is the right to enter the industry. In the free market, anyone can produce alcohol but in Ontario only the government may grant this right of entry and sale. It is a result of these special privileges that the monopoly price and gain arises. Unlike free market profits, this gain does not disappear in time – it is permanent so long as the government allows it or the people put up with it.
The Ontario government has created monopolistic grants to supposedly serve the public. But what exactly is the result? Brewers Retail is a government-enforced cartel which brings in excessive profits each year. These profits do not diminish in time, as they would in a free market, due to government backed violence. Furthermore, licenses are required to meet arbitrary rules before businesses outside the cartel (such as restaurants and bars) are allowed to sell alcohol. The government imposes tariffs and other measures that levy a tax on competitors outside Ontario’s jurisdiction. Yet despite of all this, the Ontario government claims moral authority! As if alcohol, if left to the market, would result in an entire province of alcoholics.
Prohibition is still alive and well in Ontario, it’s just been masked by the Brewers Retail cartel and the state-owned LCBO. As as to be expected, after 86 years there is public opposition to the coercive monopoly of such popular goods. Whether anything is done depends on how willing Ontarians are to fight for it and whether the government can be persuaded.
A recent study found that if the LCBO loosened its monopoly, it would still receive the same amount of revenue, if not more. The author of the study, professor Anindya Sen, used computer models compiling statistics from other provinces, such as British Columbia. His two “key findings” are:
1. contrary to common belief, expanding alcohol retailing beyond the LCBO and Beer Store would preserve the LCBO’s profit and also provide the framework for even greater profits for the government; and,
2. the vast majority of revenue Ontario receives from alcohol sales comes from LCBO’s wholesale mark-up of alcohol.
Professor Sen may be correct here. Subjecting the LCBO to competition would force the government entity to market conditions, putting them more in tune with consumer demand. As most convenience stores (Sen’s study was financed by the Ontario Convenience Stores Association) would engage in a retail mark-up, the LCBO would still find revenue in their wholesale mark-up. In fact, the LCBO would still have a lot of influence, as would The Beer Store, or Brewers Retail, whom would likely still have the exclusive distribution rights. Although Ontario’s outdated retailing system harms consumers and producers, following British Columbia’s “privatization” example would be a marginal improvement.
Assuming that politicians, bureaucrats and crony-capitalists work for their own self interest – keeping alcohol revenue in the hands of government or a beer cartel is destructive to say the least. Anything less than a complete free market in alcohol will have unintended consequences. No sane politician in this day and age will advocate absolute prohibition, but will defend semi-prohibition as an ethical stance. But just as prohibition made criminals out of consumers and exalted mafia-entrepreneurs to millionaire status, semi-prohibition injures consumers and exalts the criminal class of government bureaucrats and crony-capitalists to moral superiority. Even to the point where an arbitrary rise in alcohol prices is justified for reducing STDs and teen pregnancies. Absolute prohibition and semi-prohibition have always been about one thing: social engineering.
*The Beer Store is owned by Anheuser-Busch InBev of Belgium, Molson Coors Brewing Company of the United States and Sapporo of Japan.

No comments:

Post a Comment