How Would You Solve This?

What to do about a shortage of liquor licenses… or taxi licenses…

New Jersey USA has a shortage of liquor licenses. Laws dating to the end of Prohibition limit the number of bars in each town. Even to serve wine in a restaurant, the owner must buy a scarce license from some other existing license holder in the same town. Planners in some cities want to expand the number of licenses in order encourage a more lively “restaurant and bar scene” in their downtowns. ¹

But there’s a complication. Current restaurateurs typically have paid hundreds of thousands of dollars for their licenses. The license may be an owner’s most valuable asset. Creating more cheapens existing ones, due to good old supply and demand. This is a financial blow to local entrepreneurs who have devoted themselves to serving the community — the same spirit that planners want to see more of.

What would you do, in order to expand the number of bars in a town, but also be fair to existing license holders?

Of course there are potential bureaucratic solutions. Perhaps government can compensate the existing owners. Proposals have been floated to give them tax credits. You know who pays for tax credits.

Here’s my free-market-based, minimally-bureaucratic solution. Just give additional licenses to existing holders. Free!²

For example, suppose we wish to double the number of licenses in a town. Just give one new license to each existing licensee. Each new license may be resold. New licenses that come on the market in this way encourage the desired commercial development. They likely also will drive down resale values, making it cheaper to open an establishment, another benefit to the community.

But equally important, existing owners receive recompense for the diminished value of their old licenses. If doubling the supply of licenses drives their value down by half, then each existing owner is made whole. Of course, we don’t know in advance how much new licenses will affect market values. Prices might drop by more or less than half. But the possibility of their going higher than that compensates owners for the risk of them going lower.

The ratio of new to old licenses needn’t be 1-to-1. One could, for example, issue half a license to each holder. Then any potential new bar owner would need to buy two half licenses to proceed with serving booze.

New York long ago could have expanded the taxi fleet while protecting the investment of existing holders, by a plan similar to that described above.

Such a scheme has other applications. New York City for many years had a shortage of taxis, because the number of licenses, called medallions, stayed constant as the city grew. Owners typically had paid $1 million for a medallion, and lobbied to forestall the city issuing new ones. Banks that financed medallion purchases supported them.

New York long ago could have expanded the taxi fleet while protecting the investment of existing holders, by a plan similar to that described above. This is becoming a moot point, however, as the rise of Uber and Lyft has depressed the value of taxi medallions in any case. Still, expanding medallions might create a partial counterweight to the ride-sharing industry. New Yorkers typically turn to ride sharing when taxis are scarce….

1. “Liquor licenses in New Jersey cost $350K and it’s crippling the state’s dining scene.” North Jersey Record, Oct. 18, 2018.
2. The author first proposed this idea in “A sensible solution on liquor licenses.” North Jersey Record, Oct. 24, 2018.