When Bad Laws Create Good Outcomes: Prohibition Edition

A couple of months ago, Dubner and Levitt wrote about how poorly constructed laws can lead to some unintended consequences. Let me add one more example to their list, albeit one that I’m enjoying.

The Pennsylvania Liquor Control Board was set up in the wake of the 21st Amendment, and the end of Prohibition. A direct (and presumably intended) result is that Pennsylvania has some of the strictest licensing laws in the country, making it painful and costly not only to buy but also to sell liquor.

The market’s response? Given that liquor licenses are so expensive (and licensed restaurants are forced to buy their wine through an overpriced state-controlled monopoly), it just isn’t economic for most restaurants to serve alcohol.

Instead, Philly’s diners are invited to Bring Your Own. While B.Y.O. is common elsewhere (such as in my native Australia), the unique thing about Philly is that unlicensed restaurants aren’t allowed to make any money from liquor-related sales — and as such, they do not charge a corkage fee. Moreover, this isn’t offset by a decline in quality: Philly has an outstanding set of B.Y.O. restaurants.

As a result I both eat out more often, and enjoy wine with my meals more often, than when I lived in wine-crazy San Francisco or Sydney. After all, it’s the law: the law of demand.

And I benefited yet again on Tuesday night. Several restaurants participated in a local food festival, serving tasty morsels in a public square. For $10, I could buy 5 “tickets” entitling me to five small plates of Philly’s finest offerings. Interestingly, only one group was offering its wares for free: the Philly brewery serving locally made beer.

Presumably this reflects the difficulty of obtaining licensing to sell their brews. So the beer tasting was free, and instead of just enjoying one glass with dinner, I may have ended up indulging a bit more, tasting each of their varieties.

A strange postscript to this event: We usually expect prices to equate supply and demand. Yet at 9 p.m., as the food festival was closing down, most of the restaurants charging $2 per plate were out of food, but the brewery still had ample supply, continuing to sell its beer at $0 a pop.

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  1. J says:

    As a Pennsylvania resident its nice that you noticed one of the few upsides to the arcane and frankly stupid alcohol laws. The liquor licensing system has interesting ramifications for restaurant-type establishments, but the other side of it is the wine/spirits stores, beer distributors, and “6-pack” laws. If I want to buy groceries, get some beer, and a bottle of wine I have to visit three separate stores, often separated by a mile or more each. The free beer you enjoyed is offset by my time’s opportunity cost, not to mention the gas in my car :)

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  2. discordian says:

    I have spent most of my life around where NY/PA/NJ come together.
    I always thought PA’s liquor laws were the strangest.

    There are a lot of BYO places in NJ too. Almost any Mom & Pop Italian place around where I live will open your bottle and give you glasses to use on the house. They’re more than happy to do that to keep you coming back to their place rather than going to Olive Garden, Pizza Hut, or Macaroni Grill.

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  3. Anne says:

    BYOB places are a fresh-out-of-college kid’s dream! They provide an easy way to eat out cheaply, while still enjoying alcohol. We have lots here in Chicago, and they are the most fun. My complaint is that I wish there were MORE BYOB places.

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  4. chappy says:

    Interesting post. My follow on question is why is there so much mark-up on wine in the US (and apparently Austrailia). This is very clearly not the case in much of Europe. I’m guessing that American’s just drink less wine per capita, but there’s part of me that thinks we treat wine somewhat like a luxury good.

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  5. Jeremy says:

    Hoboken, NJ is the same way. Many of the restaurants around the city are BYO, making my dinners much cheaper. :)

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  6. PA resident says:

    @J – The unintended consequence of the strict PA laws that cause the painful drives you describe is that I am sure that people stock up much more here than in other states. Liquor stores are few and far between, especially those with good selections. Beer is ridiculously expensive at the 6-pack stores, so most people buy by the case at distributors. So, people in PA buy their beer by the 24 and stock up on wine when they have the chance. Does buying in bulk reduce drinking? I don’t think so.

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  7. misterb says:

    Elementary economics suggests that PA residents should be losing out on their choices in restaurants. In unregulated states, restaurants make much of their profits in booze sales. As a result, when deciding where to invest their money, PA residents should find many superior alternatives to restaurants (other business returns being equal with other geographies)
    I’ve never been to PA, but I’ll guess that, in fact, there aren’t noticeably fewer restaurants there; indicating that people get into the restaurant business for reasons other than maximizing their profits. From my point of view, that says a lot of good things about the people of Pennsylvania.

    BTW, cheese steaks don’t appeal to me at all.

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  8. Desi says:

    It’s worth mentioning that Prohibition was one of the most striking examples of Law of Unintended Consequences of all time.

    Through Prohibition, a few high-minded individuals who outlawed alcohol, in essence, bankrolled the Mafia, as mobsters controlled Prohibition-era liquor distribution and made ridiculous sums of money, bankrolling their other operations.

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