Subsidies Work Better Than Regulatory Prohibitions

(cc photo by jonnamckone)

Natalie Avery has a very good post about the contrast between "voluntary agreements" to restrict liquor licenses and intervention to create a "temporium" pop-up shop in Mount Pleasant. It's a parochial neighborhood concern, but I urge you to read it since it's a nice micro-level illustration of a general phenomenon—if you want something to happen, it's much more effective to subsidize it directly than to try to call it into existence through regulatory prohibitions.

Throughout urban America, the market wants to generate lots of bars, restaurants, and other entertainment venues since that's the comparative advantage of an urban location. The market also tends to prefer chain retailers to independently owned ones, since there are economies of scale lower costs of capital, etc. But even though this is what people vote for with their wallets, people generally say that they want more independently owned neighborhood-serving retail. Which is fine, but regulatory restrictions on the supply of restaurants and chain stores is a pretty inefficient way to bring this about. The correct way to ensure the existence of more stores of a particular kind is to actually go out and see how much direct subsidy it would take to make it worth someone's while to open one. Then you can evaluate the tradeoff and decide what you want to do. My suspicion is that oftentimes we don't do that because the voters don't, in fact, actually want to pay the price. Which is fine. But people shouldn't trick themselves into thinking that trying to create subsidies via regulatory restrictions is "free," it's actually quite costly—almost invariably more costly than ponying up the cash would be.