Mundane daily occurrences often involve some economics, hence the title of this column. The recent to-do over Surdyk’s liquor store in Minneapolis defying a state Sunday-closing law is no exception. The owner was promptly fined $2,000 and his license was suspended for 30 days — effectively closing the store for that period of time.
Adding insult to irony, the 30-day suspension period begins July 2 — the day the first legal Sunday liquor sales will commence after state lawmakers repealed the 159-year-old ban last month. By jumping the gun, Jim Surdyk will miss the party.
The effects on the overall economy are zero but the response provides good examples to econ teachers like me.
A key economics principle was actually raised in a letter to the editor that argued the loss to the state and federal treasuries of taxes levied on liquor that not would not be sold by the store over 30 days far outweighed the value of the fine. Authorities implicitly were chumps, giving up more than a million dollars in liquor tax revenue from a closed store and getting back only $2,000. That assertion prompted reader queries to me about which side is correct. Answering that is a perfect intro to the economics of “substitutes and complements.”
These are part of the basics of supply and demand and are taught together with “elasticity,” a numerical measure of how big a change in quantity is associated with a given change in price. Simple elasticity questions are: If the price of ground beef drops to $2.99 per pound from $3.49, how much will the quantity sold rise? If the price of soybeans goes up 10 percent, how many more beans will Minnesota farmers produce? One of the most important factors determining the sensitivity of these price-quantity interactions is the availability of substitutes, either in consumption, for demand, or in production, for supply.
For example, if the retail price of beef goes up but other meats stay the same, then the quantities of beef people buy will drop substantially. Pork, chicken, turkey and even fish are pretty good substitutes. But if the average price of gasoline goes up, quantities bought do not drop much because there is no ready substitute, especially in the short run.
As the price of corn drops, so does corn production, because the same land, machinery and other inputs can be used to grow soybeans. But if the price of milk drops, dairy farms don’t cut output because the facilities, feed and equipment for dairy cows cannot be used to produce turkeys, hogs, lambs or eggs. For milk, there are no good “substitutes in production.”
So much for the econ lesson. What does this have to do with a liquor store and whether closing its doors for a month really will cut government tax revenues by over a million dollars?
The quick answer is that the letter writer’s assertion is certainly wrong. As long as there good substitutes for liquor sold at Surdyk’s, total sales to consumers will not fall much, if at all. And there are many good substitutes, namely identical brands sold at dozens of competing stores in the same general geographic area. And starting July 2, on Sundays to boot.
The assertion that the government would lose large amounts of liquor tax revenue if one store is closed for 30 days depends on the assumption that all of this store’s customers would suddenly become teetotalers for the entire time the license suspension is in effect. This is preposterous.
People may like a particular location or proprietor, but if that preferred store is not open, they will drive to the next best source, just if they do if the store where they usually buy milk happens to be closed when they need it.
The kicker is that, due in great part to its addictive qualities for some drinkers, overall demand for alcoholic beverages by consumers as a whole is quite inelastic. That is, the total quantities purchased in the entire market do not decline much when retail prices go up.
However, as you move from all alcohol lumped together to individual categories, demand becomes more elastic. That is, if the price of distilled spirits increased by 20 percent while beers and wines stay the same, some people who normally prefer such hard liquor will shift to non-distilled alternatives.
Similarly, if all imported beers go up in price, say because of a decline in the exchange value of the U.S. dollar, then, at the margin, some Corona and Heineken drinkers will switch to domestic brands. And if the price of any individual brand, whether a bourbon, chardonay or pilsner, rises much against competing brands in the same category, sales will drop sharply.
Liquor is not a “durable good.” If you are thinking of buying a new car or clothes dryer and the auto or appliance dealer of choice has to close for a week because of fire damage, it is easy to hold off shopping until they are open again. But most regular drinkers who are out of their favorite liquid are not going to wait 30 days,or even 15 or 5, just to deal with a familiar checkout clerk.
Just as alcoholic beverages are not durable, most are not a “differentiated product” at the level of the store. Yes, dedicated Coors or Jack Daniels drinkers are scornful of other brands. But they don’t care if their favorite was bought in Southeast Minneapolis or a few miles away in Roseville.
The idea that the availability of substitutes determines price-setting ability is important. If a higher state minimum age increases costs at restaurants and supermarkets, only ones located on state lines will be unable to pass most of the increase along to consumers. As long as your competitors costs go up by the same factor as yours, it isn’t a big problem, you will not lose business. But if a labor cost increase applies only to the city of St Paul, there are meals and groceries in Roseville, Maplewood, Woodbury and on and on. So St Paul-based businesses would be in a genuine bind.
Similarly, Minnesota farmers are used to seeing hundreds of millions of dollars of their soybeans go to China. But that does not mean China must keep on buying that same quantity regardless of what happens politically or economically. There is a good substitute called Brazilian soybeans. In contrast, there probably are not very good substitutes for some medical devices manufactured in Minnesota that at least some Chinese can afford. So a trade war or currency fluctuations will not necessarily affect agriculture and medical devices equally. In general, commodities, by definition, have good substitutes and their producers are more vulnerable to purchasers going elsewhere.
One footnote: No one seems to be paying attention to Surdyk’s employees. Will they will all get regular paychecks and just paint stripes in the parking lot or sealcoat the warehouse floor for 30 days? Or will most be laid off? If so, they are the real victims of a scofflaw boss. But, at the margin, workers at other liquor outlets in the general area may get more hours and the store owners will have greater sales and profits that may be reinvested or spent. The economy of the metro area won’t suffer at all. Nor will the treasury at any level of government.
One final point: We don’t know a lot about why consumers are loyal to familiar brands or familiar stores. Some of it is the expense of getting information about the desirability of new competitors. Some is the psychological security of familiar actions or things. But if our favorite store closing for 30 days forces us to the effort of going elsewhere, the information we gain may convince us it really is easier to buy at that new big box liquor outlet near our home than to go back to the store we started going to as students. To what extent this erosion of loyalty to the Surdyk’s brand occurs or persists after July 31 will be an interesting experiment.