Some years ago a friend was complaining about the cost of a particular computer accessory. Another friend said, “You just need to encourage people to buy them. As soon as demand goes up, prices will come down.”
I couldn’t quite believe what I heard, so I asked the second friend to repeat it. Then asked a couple of follow-up questions, to clarify. Yep, her understanding of the Law of Supply and Demand was: “When demand goes up, suppliers figure out how to lower prices.”
So I had to explain that the Laws of Supply and Demand describes how economic equilibrium changes in a competitive market. If demand goes up, while nothing else changes, then price will also go up, not down. One way to get to the lower prices is for demand to get high enough that more suppliers see a chance to make a profit and jump into the market, leading to supply going up, which tends to push prices down, which in turn may make some suppliers try to find ways to more cheaply produce their supply (in order to preserve their profits), et cetera. The end result may be that prices go down, but it takes a few back and forths of the seesaw before that happens.
Her response: “Well, my major was Literature, so of course I never took any Economics classes in college.”
I told her that I’d learned about supply and demand in middle school social studies. And then been taught it again in high school civics.
“Really? What does economics have to do with society or government?”
Watching how my state’s liquor privatization adventure has played out brought that flabbergasting question back to mind.
For a long time, liquor sales and distribution in Washington state were regulated by a state-appointed board. The board had been set up in response to the 21st Amendment to the U.S. Constitution, which repealed Federal Prohibition and sent the regulation of the production, distribution, and sale of alcohol back to the states. Among the goals the board was tasked with were to provide uniform pricing and uniform availability throughout the state, as there was a feeling that rural residents had been gouged by suppliers in the past.
There were many other factors in play. The complex and sometimes very dysfunctional relationship society has with the use of intoxicants, the moral absolutism some people project on intoxicants, as well as a tendency to look for simple solutions to complex problems (which had led to Prohibition in the first place) insured that.
There had been many previous attempts to privatize the distribution of alcohol. Most of the legislative attempts bogged down over economic issues, rather than moral arguments. Timid legislators have increasingly turned to cigarette and alcohol tax increases to close gaps in state revenue, as it is harder to rally the public against a tax increase on substances that many feel were sinful, and which very few feel are necessities. There is also the fact that some (and sometimes most) of the costs of individual misuse of alcohol falls on the public, not just the person(s) directly involved.
Since a privatization initiative nearly passed a couple of years ago, the legislature did finally pass a law setting up a bidding process to open alcohol distribution to private companies and begin the process of disentangling the state from the process. It would have been interesting to see how that worked out.
Unfortunately, some of the larger retail corporations, who had been donors to the previous initiative, felt the state’s process was a bit too intent on encouraging competition, so they dumped money into another initiative, which included language giving existing large grocery stores a virtual monopoly on the sale of alcohol.
This time, the voters passed it.
There are a couple of provisions meant to allow some competition. People could bid on the right to take over old state liquor store franchises. And restaurants and bars could turn to other distributors, including out-of-state distributors.
Except that the large grocery store chains have used a combination of existing lease agreements or the threat of moving their stories to prevent landlords for letting the new, smaller liquor stores open. And, surprise! Surprise! Surprise! Prices have gone up while selection has gone down.
Imagine! We went from a non-profit system owned by the public and charged with selling and distributing a popular (and sometimes problematic) product to a system run by for-profit companies, and the prices went up. Who could have possibly foreseen that?
Things like the law of supply and demand only work in a free market (or one in which all sellers act on a level playing field). Privatization is not the same thing as a free market.
Now, those same grocery companies who essentially wrote the initiative and bought the election, are lobbying the legislature to repeal those few protections in the initiative intended to keep the distribution channel to restaurants and bars open. They want to be able to act as distributors, without paying for distribution licenses or taxes.
There are good reasons for some regulation and taxation to be involved. As I already mentioned, the costs of the misuse of alcohol fall disproportionately on the community rather than just the people who misuse it. Any product which is mass produced for ingesting by the people who buy it carry risks that are on a completely different scale than buying produce at a local farmer’s market. We need to have systems that can impose penalties when manufacturers or sellers negligently or recklessly cause harm to their customers.
Privatization can be made to work, but replacing a monopoly that was directly answerable to the public with several near-monopolies whose primary goal is to extract as much money from the public with as little effort as possible is not the answer.