By Day I Make the Cars, By Night I Make the Bars
Drinking is very much on Matt Yglesias’ mind these days, it would seem. Fresh off his positive review of taxing alcohol to pay for health care, he hits on an instructive analogy for the idea of carbon permits.
[C]urrently in Washington DC there’s a moratorium on issuing new liquor licenses in Adams-Morgan. The area already has tons of bars and restaurants and its main commercial strip is very rowdy Thursday, Friday, and Saturday nights. Consequently, most local residents favor the moratorium as a way of preventing the neighborhood from getting even crazier. One side consequence of this policy, however, is to provide a massive subsidy to existing holders of Adams-Morgan liquor licenses. This is basically the equivalent of when you give emissions permits away. The city could come up with an alternative scheme that’s aimed at trying to capture more of the regulatory surplus for public purposes. Instead of saying “no new bars in Adams-Morgan” you could cap the number of bars in Adams-Morgan at its existing level and then establish an annual auction for the right to operate a bar. That way, new competition could come to the neighborhood but if and only some entrepreneur was interested in outbidding one of the incumbents for the license.
Presumably, though, one would be much less likely to make the investment in physical plant necessary to start up a successful bar if one were faced with the prospect of bidding annually for the right to keep said bar open? And even if one “won” said auction, it would presumably cut heavily into one’s profits, making it much harder to make a go of it?
It would seem similar reasoning would apply to a carbon tax. Faced with the prospect of wildly diverging prices — having to bid just to stay in business on an annual or other short-term basis — wouldn’t firms simply seek a more favorable regulatory environment? Why not just move the business to, say, Mexico — which, after all, enjoys free movement of goods to the United States under NAFTA — and avoid the hassle?
Photo by Flickr user liber under Creative Commons license.