An economic analysis of changes in alcohol retailing in Alberta and implications for Ontario

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An economic analysis of changes in alcohol
retailing in Alberta and implications for
Ontario
Alcohol Policy Network Toronto, Ontario

• Greg Flanagan
• University of Lethbridge
• March 11, 2005

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Sobering Result The Alberta Liquor Retailing
Industry Ten Years after Privatization Greg
Flanagan June 2003 Published by Canadian Centre
for Policy Alternatives and Parkland Institute
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Outline

• Context
• Tax Structure
• Costs and Prices
• Government Revenue
• Conclusions

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Table 2.3 Percentages of alcohol beverage
expenditures in 1996
1. Context Household Expenditure in Canada

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2. Tax Structure

• Why Tax?
• Cheap to produce
• External social costs
• Revenues to compensate (internalize costs)
• Ad valorem percentage of cost (markup)
• Per Unit Tax

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3. Costs and Prices
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Landed costs of a few popular products in four
provinces in November 2002.
Source Review of Liquor Mark-up Structure and
Related Findings and
Recommendations, AGLC, Feb. 20, 2003 p66.
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4. Government Revenues
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5. Conclusions
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Loss of Efficiency

• Liquor retailing handicapped in its ability to
  achieve market efficiencies
• setting wholesale distribution and
  transportation costs
• restriction requiring stand-alone outlets
• Differentiation/excess capacity
• (Chamberlain/Robinson)
• Economies of scale
• future directions in the industry appear to
  favour large grocery chains such as Safeway, the
  Real Canadian Superstore, the Calgary Cooperative
  Association Ltd., IGA, etc
• evolve into an oligopolistic market structure

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Social Costs of Greater Availability

• Absolute alcohol consumption is high in Alberta
  relative to the rest of Canada and has begun to
  climb since 1997.
• The potential for increased social costs is real.
• Alberta government has lost effective control of
  the liquor industry.

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Costs, Taxes, and Prices

• Wholesale costs have risen
• Greater regulation and enforcement costs
• Some of these costs are incurred in the Ministry
  while others are shifted to local police
  departments
• Tax revenues (relative) have fallen significantly
• although constant in absolute current dollars
• with inflation, population growth, and growth in
  sales, real per capita revenues have fallen
  between 1993 and 2002
• Prices have increased
• but not to the degree they might have because the
  share taken as government revenue has fallen

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Incentive Incompatibility

• Public objective minimize the abuse of alcohol
• limit and control sale of liquor
• price high to capture revenue
• Socially responsible marketing
• dangers of drinking and driving
• fetal alcohol syndrome
• prevent sales to underage consumers and the
  intoxicated
• Private objective sell productearn profit.