Journalof RegulatoryEconomics; 2:83-98(1990) ~1990 KluwerAcademicPublishers State Monopolies and Alcoholic Beverage Consumption JON P. NELSON Pennsylvania State University Department of Economics, 518 Kern Graduate Building, UniversityPark, PA 16802 Abstract Fifteen states have state monopolies to regulate the retail ~stribution of distilled spirits or wine. One objective of state ownership is the reduction of consumption. However, previous research supports both no effect and a negative effect of state monopoly (control) states on consumption. Using improved data on prices, this paper provides a mixture of classical and Bayesian estimates of beverage-specific demand functions. The analysis is carried out at the state level for the year 1982. Independent variables include the real own-price, substitute prices, income, tourism activity, religious sentiment, youth proxy, and several regulatory measures including monopoly control, bans on price advertising, minimum legal drinking age, and restrictions on the number and type of retail outlets. The results indicate no direct effect of monopoly control on consumption that is separate from effects manifested by higher prices or, for beer, limited outlets. Furthermore, average prices are not significantly greater in the monopoly states. Several possible explanations are advanced to explain these results, including the likelihood that the higher transaction costs in the monopoly states are a tax on consumption of alcohol. 1. Introduction Following the repeal of Prohibition in 1933, the task of regulating the distribution and consumption of alcoholic beverages was left primarily to the states. Each state established its own system of control, but certain common features were broadly shared. All of the states set a minimum legal drinking age, ranging from 18 to 21. All states enacted special excise taxes on alcoholic beverages, and most placed restrictions on advertising, hours of legal sale, number and type of outlets, local "dry area" options, and so forth. Fifteen states created state monopolies to control the retail distribution of distilled spirits. 1 In the remaining 35 states and the District of Columbia, some form of licensing system was adopted to regulate the number and operation of retail outlets. Many of these regulations have recently been the subject of public scrutiny and debate. For example, between 1970 and 1976, 30 states reduced the minimum drinking age, but between 1976 and 1984, 27 of these states again raised the age limit. In California, 50 cities banned the common-site sale of alcoholic beverages and gasoline (McCarthy and Umbeck 1988), while Kansas voters recently amended the state constitution to permit liquor-by-the-drink (Hersch and McDougaU 1988).