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Microeconomics Question from Walter E. Williams:Edit

Most cities and towns that allow the sale of alcoholic beverages require all seller of liquor to have a license. Not only is the number of licenses strictly limited, but the prices of such a procedure on:

  • (a) liquor prices;
  • (b) the profits to sellers of liquor at the retail level?

What would happen to prices and profits if cities and towns limited the number of licenses and auctioned them to the highest bidder? What are the effects on the distribution of wealth of the price-regulated method versus the market method of allotting licenses?

AnswerEdit

If licenses were auctioned, the winning bidder would end up with zero economic profit because the cost of the license would be bid up so that the sale price reflects the capitalized PV of the future gains. Wealth would be concentrated in the hands of the owners of the regulated liquor stores under regulation, whereas the auction would tend to produce no economic profits in the long run.

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