Moldy Peaches

The selection of the new Martini sipper seems like a great time to visit one of the topics that has been sitting in the Moldy draft box for a long time - Privatizing liquor stores.

There was a recent piece published by the Montreal Economic Institute (a mini-version of the Fraser Institute) that warrants a closer look. The Institute examined three jurisdictions in Canada - Alberta, Ontario and Quebec and concluded the Alberta model was best - both for the consumer and government. It is important to examine the paper and analysis the facts before readers dismiss the paper as right-wing rhetoric.

The Institute examined eight key areas to allow them to make their conclusions. Each one of the areas deserves some column space.

Alcohol is not just another good

This argument is common whenever the issue of privatization comes up — for two main reasons. First, alcohol is not just another product because it presents health risks, according to a common line of reasoning that often comes with a long list of diseases related to alcohol consumption. “Alcohol is not just another consumer product. It contributes to a wide range of health and social problems... such as liver cirrhosis, cancers and addiction.”

There are plenty of products that are sold by the private sector that aren’t good for you and the government doesn’t need to nationalize those industries. For example, should the government gut in the business of making guns (given the past history with the disastrous gun registry, the question needs no answer).

Also, this rationale is interesting given the recent BC Supreme Court decision to allow governments to sue tobacco companies to knowingly selling harmful products. I wonder if a Health Department is prepared to sue the Liquor and Gaming Department?

Moreover, this medical argument is even less pertinent, because the harmful nature of alcohol consumption is not clearly recognized even within the medical profession, particularly when consumption remains moderate. For example, many studies show that moderate consumption, at least of wine, can actual assist your health. Even if there are health risks, consumers make rationale decisions to purchase the product and assume the risks and rewards.

Alcohol consumption creates externalities or social costs

Alcoholics are said to be less productive and thus to represent a cost for society. This reasoning is often used to show the economic costs to society caused by alcohol consumption. Although real, these costs are incurred in the private market by individuals themselves. People who are less productive or often absent would normally receive lower remuneration, meaning that neither employers nor society as a whole would have to cover the full cost of their irresponsible behaviour. But even if drinking were the cause of such declines in productivity, the fact that a government monopoly sold the drinks hardly eliminates the phenomenon of abusive drinking.

A government monopoly keeps fraud and contraband away

Fraud and the bootlegging have long plagued the liquor industry. Who owns the stores seems to have little impact on this, but rather the real issue is the level of taxation. This is part of the reason why cigarette taxes fluctuate when there are high reported incidences of native contraband in Ontario and Quebec.

The monopoly is an important source of government revenue

This argument doesn't seem to hold. Alberta appears to return as much money to their treasure without owning the stores as the two other provinces in question.

Table 1 - Provincial dividends from alcohol sales in 2002-03

1.Sales volume of absolute alcohol(thousands of litres)
2.Dividends from alcohol sales (thousands of $)
3.Dividend per litre of absolute alcohol sold

SAQ - QC 23,051 540,000 $23.43 / litre
LCBO -ON 41,629 975,000 $23.42 / litre
Alberta 21,432 520,667 $24.27 / litre

Number of stores

The number of stores selling liquor in Alberta spiked considerable after legislation was passed to privatize operations. In fact, the number of stores per 100,000 inhabitants over 15 in Alberta is 42. In the other two jurisdictions, it is no better than one-third of that - Quebec (13) and Ontario (8).

The number of stores does two things: creates additional employment and spurs sales competition. On the employment front, Alberta had 950 liquor board workers before privatization and that number shot up to almost 3,000 after privatization. Now, this is only tells one part of the story.

The move to a private ownership model definitely meant the creation of more jobs, however, they are much more likely to be low paying jobs with little or no benefits. These jobs are also far more likely to go to younger, transient workers rather than individuals in career mode. Also, the old public sector jobs were unionized, well-paid and had secure benefits. The real question is whether it is the job of the government to protect 950 well paying jobs and allow for an additional 2,000 to be created?

Product selection and quality of service

With greater choice, each consumer is better able to find something he or she wants. However, a broader range also creates additional costs in storage, inventory, management of in-store sales space, and so on. The same is true of customer service. Better trained sales staffs are able to give better advice to customers, but this also has a cost that customers may or may not be willing to pay and may or may not want. In a market setting, private entrepreneurs are the decision-makers who continuously watch what consumers want. This is what their profit depends on. They are better able than anybody to offer product diversity and service levels based on costs that consumers are prepared to cover. Unlike public sector monopolies, private
entrepreneurs satisfy all market niches by diversifying.

The number of different products available in Alberta liquor stores in 2004 was just over 11,500 compared to fewer than 3,500 in Ontario and nearly 7,200 in Quebec. In fact, the number of products available in Alberta has increased almost ten fold since privatization.

Beverage Prices

It isn't automatic, but 9 times out 10, alcohol is cheaper in Alberta than in neighbouring provinces. In fact, the report found that Alberta was 20% cheaper than Quebec and almost 40% cheaper than Ontario on various products. It appears the more expensive the product in public store, the greater the variance in Alberta.

Volume of Sales
One would assume that with a flood of new stores and potentially loose rules (selling to minors) those sales would be way up in Alberta. This is, however, not the pattern. The jurisdiction enjoying the largest growth in alcohol consumption is by far Quebec.

It appears that nearly 20 percent of Ontario liquor sales are coming from the black market and that is not good for taxation purposes.






Conclusion

Various Canadian governments have studied the idea of full privatization of liquor stores and all have pulled back at the last minute - many despite recommendations to the contrary. The evidence seems to be in favour of not just privatization, but also liberalization of sales. For example, why 7-11, ESSO or Superstore can not sell the liquor within in their four walls is beyond me. Finally, all provinces need to do a better job of loosening beverage laws in restaurants and bars. Consumers should be allowed to bring their own wine, leave with product corked and bars should not have preset hours of operation.

Agree or disagree, comments welcome.