Monday, May 11, 2009

Iowa City Bar Restrictions

Recently the Iowa City City Council passed a ordinance (only a first consideration) that would prevent new bars from opening up within 500 feet of another bar and limits liquor stores to be 1,000 feet apart. While the ordinance applies to all of Iowa City, it's it aimed at downtown Iowa City, and the ordinance is extolled as a means of reducing binge and under-age drinking among UI students. As an economist and resident of Iowa City, I do question whether this is the best way to tackle alcohol consumption problems here in Iowa City.

I an unconvinced that the Iowa City city council can do anything to reduce binge drinking, which is an individual choice. I do think that the Iowa City city council can do something about under-age drinking - one way of doing that is to enforce current under-age drinking laws, and the second is the make under-age drinking more costly to bar owners. For example, if a person is found to be under-age and consuming alcohol at a bar a high cost penalty would be to revoke the bar's liquor license. As the opportunity cost of allowing under-age individuals to drink from the bar owner's perspective increases, the bar owner has an optimal choice to reduce serving alcohol to under-age individuals. Will under-age drinking stop - NO, but it will definitely not stop with the ordinance passed by the Iowa City city council.

Now do I expect the Iowa City city council to actually try to pass an ordinance stating that if under-age drinking occurs in the bar that the bar's liquor license will be revoked - NO, since the cost to the city would be a substantial reduction in revenue from sales tax and property taxes collected from downtown bars.

So thinking about this policy from a Prin. of Microeconomics perspective, what would be the effects in the Iowa City downtown bar market? First the city ordinance will limit (but not completely limit) new bars from entering the market. Given an expected increase in the demand for bars in downtown Iowa City, the first effect we can expect from this is that the price of beer sold at bars will increase, and there should be a decrease in quantity demanded in downtown bars. If the demand of consumer in downtown bars is price inelastic (I suspect it is highly price inelastic), this will also increase bar owners revenues and increase bar owners profits.

While some have argued that the City of Iowa City's revenues may decrease due the ordinance, I do not think that will be the case. Given my prediction that bar owner profits are likely to increase due to the restriction on competition, the city can raise the price to bars for renewing a liquor license, thus allowing the city to capture a part of the higher profits from the partial entry restriction passed by the Iowa City city council.

Additionally an unintended consequences of this policy may result in the restriction leading some to bar hop outside of the downtown district where transportation is either by foot or by Cambus to traveling by car. This leads the likelihood of higher driving while intoxicated incidents and the large negative externalities caused by drunk driving.


Jerry S said...
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Hunter Freeman said...

I think we are all missing the point when we say the "city" wants to limits bars. What is really happening is a minority of people ( the council members) and their friends (other bar owners?) are trying to restrict when someone can open a business. It is basically a government enforced monopoly that should NEVER exist. But once again if they can get your asking the wrong questions, it doesn't matter what the law actually means to the individual. And don't even get me started with the underage drinking b.s.