Licensing Is About Protecting Incumbent Businesses

Most licensing efforts are nominally sold based on some public or consumer good but almost always end up being mostly about protecting politically connected incumbent businesses against new competitors.   Nowhere is this more obvious than in liquor licensing.

If you want to start a new liquor-based business (restaurant or bar) in Phoenix, it is going to cost you a hundred grand just for the license.

In fact, the sales price for existing licenses has dropped in recent years, with prices for a bar license in the Phoenix area slipping from $100,000 to $85,000 or $90,000, he said.

And these are the numbers with record-low demand.  Why does Arizona (or most other states) limit the number of licenses at all?  Why not just issue them to all comers, and let the market sort out who is successful and who is not?  Certainly we would likely see a lot more interesting restaurant startups if there was not an effective $100,000 tax on starting a restaurant imposed by the state.

State officials used to pretend the reason was to protect the community from being overrun by, er, dining choices or bars or whatever, but nowadays they don't even bother with such justifications and just give the true reason - they are protecting incumbents from competition.

Arizona hadn't awarded licenses since the late 1980s before the 2005 law passed. That was largely because holders of existing licenses didn't want to diminish their resale value.

Well, I am a holder of several existing Arizona licenses and I say -- open the floodgates!

  • Michael

    In the Cincinnati area, the case for or against a liquor license is portrayed as a moral/social obligation to a community. Basically, a lower middle class and on up community can get a liquor license for a new store or restaurant. In the poorer communities here, there are groups that actively work with police to setup stings with the goal of revoking liquor licenses of businesses that serve the poor.

    To some degree this is just a mask to drive the poor out of areas so it can be redeveloped. It's not uncommon for an area to go dry, the city inspectors start issuing violations to building owners, a public-private group buys the area's buildings, and presto, new condos along boutique restaurants and stores selling liquor.

  • mahtso

    Arizona has 17 types of liqour license, the cost of which varies and many of which are non-transferable. The number of restaurant licenses is unlimited so any qualified person can get a license without paying $100,000. The fee is $2000 per year with renewals at $500 and these are non-transferable licenses.

    “Restaurant" means an establishment which derives at least forty per cent of its gross revenue from the sale of food....

  • Great post. We just featured it to the 6,000 members of Small Business Against Big Government.

    Barriers to entry should be provided by the competitive dynamics alone, not by laws that favor incumbents over new entrants.

  • And don't even get started on NYC taxi cabs.

    Whoever thinks America is "free" is nutz IMHO.