Drinkers pay the price of limiting pub licences

The worst kinds of distortion of the market, most damaging to the public interest, are the fixing of prices by a limited number of producers and artificial restrictions on the supply of goods or, more commonly, of services.

A lot has been done by successive Irish governments to tackle price-fixing, but the public authorities have been slower to tackle quantitative restrictions on supply - and in certain instances have themselves applied such restrictions.

Examples of such artificial limitation of capacity by the public authorities are the licensing of public houses and taxis - licensing being accompanied by price control in the latter case. In the transport sector there are also restrictions on the supply of bus passenger transport.

All of these public authority-organised or state-tolerated restrictions on supply have been justified by a wide range of arguments, some of which may at times have appeared quite convincing. A number of them may, indeed, have found some real justification in the past. But all of them also have negative implications for the public interest, and some have actually had quite perverse consequences, including the artificial value such publicly-imposed restrictions often add to the value of privately-owned assets.

A wide range of arguments have been deployed in the past to justify State-imposed quantitative restrictions. Thus, between the 1930s and the 1970s quota restrictions on the import of goods such as fabrics to Ireland were defended on the grounds that even very high tariffs on imports might not be sufficient to secure the retention of enough of the Irish market for local producers. Whatever truth there may have been in this contention, the effect of thus protecting the woollen and worsted industry from any outside competition proved disastrous.

From the pilot survey of this industry that fellow-economist Gerry Quinn and I carried out in 1960-61, it was clear that because of the blanket nature of this quota protection most firms in the industry had had no incentive to produce efficiently and were simply not equipped to survive in free trade conditions.

By contrast tariff-protected industries - even some with quite high tariffs - had a better chance of surviving under free trade because they had always faced some competition from outside producers.

Licensing of public houses, on the other hand, was introduced to limit the proliferation of these establishments, which was seen as contributing to alcoholism. The licensing system was used as a means of actually reducing the number of pubs, by requiring two old licences to be extinguished for every new licence issued.

This situation gave pub licences an artificial monetary value, which has since been enhanced by a combination of gradual urbanisation and increased prosperity. This has created a strong demand for new pubs, particularly in areas of expanding population.

Instead of the State profiting from the additional value created by its licensing system, the benefits of this state action have in fact accrued to existing pub-owners in the form of a temporary gratuitous enhancement of the value of their bricks and mortar. The costs of this enhancement are then carried by pub-users, especially in urban areas, who have to pay more for their pint, etc., to enable the publican to recover the additional costs of the licensing system.

It may be doubted whether the intended benefits of this licensing system, in the form of a gradual reduction in the number of pubs, have been worth the price paid for them by consumers of alcohol in pubs.

Only in new suburbs, and in new towns such as Tallaght or Shannon, has drinking accessibility been constrained by this system, and I am not aware that any survey has ever been carried out to determine the extent to which this has actually had any effect on the level of alcoholism in these areas.

In the absence of such evidence, the retention of this licensing system probably just reflects the political influence of publicans. Politicians know that if their party were to move to abolish pub licences, the powerful publicans' lobby could, through contacts with their customers, influence opinion strongly against that party.

Taxi licensing has had even more striking negative effects, in the form of a severe restriction on the availability of taxis to the 40 per cent of our population who now live in our principal cities. I am not clear what benefits the restriction of taxi licences was ever intended to confer on the public.

Of course there is a good reason for taxi licensing itself, as distinct from arbitrary restrictions on the number of licences issued. It is desirable in the public interest that taxi vehicles should be of an appropriate standard and be adequately maintained, and that taxi drivers should, as in London, be tested for their knowledge of the area they serve and for other relevant skills.

To what extent our taxi licensing system has been used to good effect for these purposes is a matter for debate.

The scale of the artificial private wealth created by this restrictive public licensing system of taxis can readily be calculated: with licences apparently being traded at £80,000 each, the total private value of the 2,000-odd current licences issued in Dublin alone must be of the order of £160 million.

And at an interest rate of between 7 per cent and 11 per cent - depending on the source from which the purchase price is borrowed - or alternatively the loss of the yield from such a sum invested elsewhere, the additional costs this imposes unnecessarily upon Dublin taxi-users must be of the order of £10 to £15 million a year.

Given these figures, it is understandable that taxi-drivers who may have paid £80,000 to acquire a licence from a previous taximan should be concerned to be compensated for the disappearance of this artificial element in the value of their business.

And, given that the State's prolonged acceptance of this artificial situation may have misled some individuals into thinking that the licence payment represented a secure and permanent long-term investment rather than a highly-speculative and temporary one, there is certainly a case for cushioning the effects of abolishing the restriction.

It is less evident, however, that such consideration should extend to companies or wealthy business people who have accumulated investments in these licences which they subsequently lease out to taxi operators. Those who made such investments must be deemed to have known the risk they were taking.

The best solution to this problem would, I believe, be along the lines proposed by John Fingleton of TCD last year, namely, issuing a second licence to the holders of existing licences from which these holders could benefit as a form of temporary compensation, pending the abolition of licences three years later.

But I would add the qualification that in the case of investors in multiple licences, their allocation of additional licences should be scaled down. This would have the advantage of warning people buying other licences such as those for pubs that these could be wasting assets rather than secure investments.

This might then facilitate an eventual move by some courageous government to tackle this other major artificial monopoly.

A solution of the taxi problem along the lines of the Fingleton proposal would seem to me preferable to what has recently been proposed, namely, the addition of a measly 200 additional licences each year for the next 10 years, for that would simply ensure the perpetuation of the artificial taxi famine for a further decade.

Is it too late to look again at this unsatisfactory solution to an urgent infrastructural deficiency that damages both business efficiency and the development of tourism - as well as inflicting constant hardship on our urban population?

So far as bus transport is concerned, Bus Eireann already meets severe competition from private operators. To the extent that it may have a higher cost structure, it has the counter-balancing advantage of scale of operation.

It should be capable of competing on an equal basis against private operators without requiring any further protection, although to the extent that it may operate some routes at a loss for social reasons, it should be freed of any obligation to maintain such services which could then be licensed to whatever operator, public or private, would provide a satisfactory service for the lowest subsidy.

Urban transport is a different matter. So long as private cars in urban areas are not charged for the congestion costs they impose on others using public transport, the provision of an adequate bus service will require subsidies - possibly bigger subsidies even than those now paid to Bus Eireann, which is clearly under-funded.

The most efficient urban bus transport system would be one planned as a single system, the operation of each route or group of routes to be undertaken at the required frequency by which operator, public or private, puts in the most favourable bid - whether this involve a payment by the operator for the right to operate a profitable route or a subsidy payment to the operator if the route is unprofitable but socially necessary.

These are the kind of policy decisions now required if we are to enjoy the efficient, low-cost, transport infrastructure needed by a dynamic modern state.