State Population Restrictions on Retail Alcoholic Beverage Licenses [updated Dec. 2006]

Many states of the U.S. use population formulas to limit the number of on premise or off premise retail alcoholic beverage consumption outlets. The purposes of these restrictions are to reduce the negative externalities from alcoholic beverage consumption and to limit the spillovers associated with the outlets themselves, such as noise, loitering, crime, and proximity to school children. State population restrictions on outlets may be superior to alcoholic beverage control systems that rely on state excise taxation to reduce negative consumption externalities and on local governments to control outlet externalities if the politics of local zoning override outlet spillover considerations. However, a disadvantage of state mandated population formulas is that they cannot take account of differences in alcoholic beverage demand that are independent of resident populations. Furthermore, the literature is not conclusive with respect to the effects of outlet limitations on consumption. In this paper we investigate the effects of the number of retail alcoholic beverage outlets on beer, wine, and spirits consumption in the U.S. We depart from previous approaches by separating outlets into their on and off premise components. We also examine, for the case of New Jersey, the variation in the market value of alcoholic beverage retail licenses that results from the mismatch of outlets from state population formulas with local area alcoholic beverage demand. We do so by analyzing data from municipal auctions of new retail licenses and by analyzing the relationship between restaurant meal and drink prices and alcoholic beverage licenses. We find small or statistically insignificant off premise outlet effects on alcoholic beverage demand, statistically significant employment and income effects on the market value of licenses, and quality constant higher prices in licensed New Jersey restaurants that reflect the opportunity costs of license ownership.state alcoholic beverage control policies, retail alcoholic beverage licenses